Chinese industry surprises (Daily analysis 1.06.2020)

Positive sentiment is being overshadowed by reports of protests in most US states or further signs of worsening geopolitical tensions - the dollar is still weaker, the zloty is stronger. Surprise comes on the Chinese industry, which in May practically returned to pre-pandemic growth.

The US-China situation is getting worse and worse

The first trading day of the new week started in a relatively positive sentiment, which was a continuation of something observed also last week. The market continues to be detached from current realities and focuses on future growth in economic activity linked to the lifting of restrictions.

And the reality has been getting more and more dramatic lately. The protests in most US states last weekend and the imposed curfews in some cities may make it difficult to return to an increase in activity, one that may be slightly slower than expected. In addition, the first phase of the trade agreement between the US and China is beginning to show new flaws.

According to Bloomberg's reports, two Chinese state-owned trading companies (Cofco and Sinograin) have been instructed to stop buying some US goods, including soya. This is another "step" towards worsening relations between the US and China, which, with the approaching US elections, will probably once again not be significantly mitigated (if at all), and two will start to burden market sentiment.

Industry goes up

The market sentiment, as economies open up in the meantime, also gets positive information. The PMI index of Chinese industrial companies published this morning unexpectedly indicated an increase in May. The reading at 50.7 pts. exceeded market expectations by 1.1 pts., thus basically returning to pre-pandemic levels (51.1 pts. in January).

How the economy in China is coming back to life may be an indication of what to expect in other parts of the world in the weeks to come, given that China may have lifted restrictions a little earlier than the rest of the world. This is a positive stimulus for the market, although the final path to return to pre-pandemic GDP levels will depend on how consumer demand will develop in the coming months.

The weaker dollar still helps the zloty

Despite the potential problems and supported by central bank actions, the market remains "optimistic", which is reflected, among others, in the continuing weakness of the dollar. The EUR/USD exchange rate remained above 1.11 until midday today, close to the upper limit since mid-March. Together with, for instance, increases in the equity markets, it makes it possible to maintain a relatively high level of risk appetite for most emerging currencies, including the Polish currency.

The zloty did not react particularly strong to the unexpected cut (by 0.4 percentage point) of interest rates by the NBP, which is mainly due to the prevailing positive market sentiment related to the global lifting of restrictions. The EUR/PLN rate dropped even slightly below 4.42 around midday (on Friday it was still around 4.43-4.46). The globally weaker US currency contributed to a further drop in the USD/PLN pair to about 3.96 - the lowest level since mid-March, similar to the EUR/USD pair.

In the afternoon, we will also see the PMI (from the ISM institute) data on industrial activity, which are relevant for the dollar. They may increase fluctuations in the dollar, but they are unlikely to affect it fundamentally - a weaker dollar is now a sign of recovery and even a higher reading from ISM does not necessarily strengthen it.