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Daily analysis 04.01.2016

4 Jan 2016 13:13|Marcin Lipka

Weaker data from China pushed the local stock market significantly lower and brought the yuan value to 4-year lows. Is it possible that market overreacted to the PMI readings? The zloty is markedly below the last close. The PMI from Poland was broadly in line with expectations.

Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.

  • 14.00: Preliminary inflation data from Germany (survey: +0.6% y/y).
  • 16.00: Manufacturing ISM reading from the US (survey: 49.2 points).
  • Tomorrow at 11.00: Preliminary euro area inflation readings (+0.4% y/y; +0.2% m/m; excluding food and gasoline +1.0% y/y).

Chinese market reaction

The first day of trading on world market can be characterized by significant rise of volatility. The Chinese stocks dropped 7%, European floors have been around 2-3% lower while the S&P500 contracts are experiencing one and half percentage losses. Moreover the EM currencies followed the slide with depreciation around 1% from Korean won to Polish zloty. What has caused such significant sell off?

Firstly it is worth to go back to January 1st when the “National Bureau of Statistics of China” (NBS) published official leading indicators for both manufacturing (49.7 points) and services (54.4 points).

The NBS data was fairly good – production subdinex of manufacturing rose to 52.2 points from 51.9 and new orders also edged higher from 49.8 to 50.2 points. Moreover the services reading rose to 16-months high. Before the Shanghai stock exchange opened today the market had known the official readings.

When the session began the manufacturing PMI from Caixin and Markit hit the wire. It showed some deterioration of the situation with drop from 48.6 to 48.2 points with Bloomberg consensus at 48.9 points.

The description on manufacturing prepared by Caixin and Markit painted a gloomy picture – production declined for the seventh time in the past eight months, both domestic and foreign demand was weak and “manufactures continued to trim their staff numbers and reduce their purchase activity”.

Just after the PMI publication hit the wire the stocks dropped by 4 percent. When the afternoon session began the Shanghai Composite was sliding by 5% and, according to new procedures, circuit breakers were initiated and the trading was halted for 15 minutes. When the transactions resumed the fall deepened immediately to 7% and the trading was closed due to new rules which limits daily moves.

There is a major question. Did investors overreact to the data? Probably yes. The market participants still have in mind the slide in last Summer when stocks dropped by 30% in less then two months. Later the fall even deepen by another 10%. Quite fresh memories probably also increased the pressure to sell the stocks. Additionally in a few days the ban on sales on large stock holdings is expected to be lifted.

From negative comments it is also worth to note the yuan valuation drop which increased the fall and brought also memories from Summer when the fears on RMB devaluation deepened threats for the whole economy. The USD/CNH (the yuan quoted beyond mainland China) rose above 6.6 level and recorded the highest levels in more than four years.

Summarizing the reaction was much more dramatic that one might have expected especially combining the NBS publication and readings from private institutions. Another important readings should be Markit and Caixin PMIs from services which are scheduled for Wednesday. If they turn to be close to the data recorded last month (51.2) the situation should slowly stabilize.

The foreign markets in a few sentences

The Chinese market conditions put aside other issues – more tensions in the Persian Gulf and comments from Federal Reserve officials. However, if the following days turn out to be much calmer in China then the issues regarding monetary tightening in the US might bring more attention. As a result it is possible that today's gains on the EUR/USD, which were fueled by risk aversion sentiment, would be quickly pared and the most heavily traded currency pair may return to lows around 1.08 on Friday.

The zloty is weaker

The zloty has reacted negatively on the Chinese sell off and stock slide on developed markets. The EUR/PLN topped 4.30 level in the afternoon while CHF/PLN rose above 3.95. Similarly to the global market the sellers seem to over reacted to the global issues and the following days should be calmer for the Polish currency.

On the other hand the PMI publication from Poland was regarded as non-event. The leading indicator for Polish manufacturing stayed at 52.1 level with the consensus around 52.3. Trevor Balchin, senior economist at Markit and author of the report writes that “The main positives were stronger growth of output and employment. New order growth disappointed, however, raising a question mark of the performance of the sector at the start of 2016”.

In the coming hours it would be important how the US session ends the evening. Moreover in the following days the key events are supposed come from China, It would be really important how the Markit and Caixin services PMI shapes the broad sentiment. There is, however, a strong probability that the market overreacted and the EUR/PLN returns toward 4.25 at the end of the week.

4 Jan 2016 13:13|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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