Back to Crisis Mode

The semblance of stability that had seemed to return to the global capital markets has ended abruptly.  Nearly every major country that has reported August manufacturing PMI except Germany, has disappointed.  China's manufacturing PMI hit a three year low (49.7 vs 50.0 in July).  Global equities have slid, and a sharply lower opening is anticipated in the US. US 10-year Treasury yields have eased about 5 bp   Core European bond yields are softer, while periphery yields are firmer.  

In this environment, the yen is the big winner. It is up more than 1% against the US dollar. The greenback has slumped to JPY119.50, where it is finding some tentative support in the European morning.  Only a move above JPY120.60 will stabilize the technical tone.   The JPY119 area corresponds to a 50% retracement of last week's bounce off the panic low near JPY116.20.  

The yen is not advancing on strong local data.  The manufacturing PMI was revised down to 51.7 from the 51.9 flash reading.  Capex rose 5.6% in Q2, down from 7.3% in Q1 and off the 8.8% consensus expectation.  

The eurozone manufacturing PMI slipped to 52.3 from 52.4 flash and July reading.  Germany's was revised to 53.3  from 53.2 flash report and 51.8 in July.  That is where the good news ends. France was revised down further--48.3 from 48.6 flash and 49.6 in July.  Italy fell to 53.8 from 55.3. The consensus was for 55.0.  Spain eased to 53.2 from 53.6.  The market expected an unchanged report.  

The UK manufacturing PMI slipped to 51.5 from 51.9 in July.  The consensus expected a small improvement.  Norway's PMI slumped to 43.3 from 45.4.  Sweden's manufacturing PMI fell to 53.2 from 55.2.  

In addition to the PMI, Chinese officials announced a new initiative.  Starting October 15, bank trading yuan forwards must put 20% of the past month's sales into a non-interest bearing account that will be frozen for a year.    The purpose of this is to curb speculative capital outflows.  Chinese officials appear to be backing off from accepting currency depreciation and instead focusing on capital outflow.  The yuan is up about 1% since August 26..   The dollar was fixed at CNY6.3752, compared with the close in Shanghai yesterday at CNY6.3790. The dollar closed today's Shanghai session at CNY6.3642.   

News yesterday that the EIA's new methodology revealed that US oil output was less than previously reported coupled a statement in OPEC's bulletin suggesting it was prepared to talk with non-OPEC producers to cut stabilize prices sent crude oil sharply higher.  The price of October light sweet crude stalled in front of the $50 a barrel mark.  It is trading with a slight heavier bias today.  

First, it is understood that OPEC does not announce policy shifts in its bulletin, and it has along said it is prepared to stabilize prices, but it will not do so by itself.  Second, EIA is expected to announce a strong build in US inventories tomorrow (~700k barrels).  Third, with volume around four times more than the 100-day moving average, and prices up 27% in three sessions, a pause is not unwarranted.   So far the pullback has been minor, and it is not clear that a full capitulation has been recorded.  

While we have played down the direct impact of China's slowdown on the US, not all countries are as fortunate.  South Korea is the largest exporter to China.  Earlier today it reported that exports slumped the most since 2009, falling 14.7% year-over-year.  It is the eighth consecutive year-over-year decline.  Exports account for nearly half of South Korea's GDP.  

Some observers have emphasized the depreciation of the yuan as the key factor here, but we are not persuaded.  The decline  in exports pre-dates the yuan's depreciation.  Moreover, as we have noted the price of money may adjust instantaneous but the price of goods are a bit stickier.  Also the goods traded in August were likely ordered 3-6 months ago.    The won has fallen by about 4.4% against the yuan this year.  The quantity of Chinese demand seems considerably more important that the price changes suggested by the currency fluctuations.  

The performance of the US equity market is key today and will overshadow the economic data. The data highlight includes August auto sales (expected to be slightly softer sequentially, but still above the 17 mln  unit annualized pace, the manufacturing ISM, and construction spending. Construction spending feeds into Q3 GDP forecasts.  

Canada reports June monthly GDP.  The consensus calls for a 0.2% increase, which would snap the contracting streak that began in January.  The Canadian economy is expected to have contracted by 1.0% in Q2 after a 0.6% contraction in Q1.  Trade and employment figures will be released later in the week.  The Bank of Canada meets on September 9.  Few expect a rate cut, but there is scope for a surprise.   There has been no follow through US dollar selling after yesterday's outside down session.  Support is seen near CAD1.3120.  Initial resistance is seen near CAD1.3250.   

For its part, the euro firmed to roughly $1.1330 before pulling back.  The next target is seen near $1.1370.  Support is pegged at $1.1250, and a break would spur at test on $1.1200.    Sterling finished yesterday's North American session below its 200-day moving average (~$1.5365).  The risk is on the downside.  A push below $1.5300 could see a thrust toward $1.5200.  

disclaimer