Swissquote Bank - China manufacturing PMI at record. Equities mixed, oil tests $40 support

August 3, 2020

by Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Equities in Tokyo (+2.10%) and Shanghai (+1.08%) kicked off the week on a positive note on the back of promising economic data. The Japanese GDP printed 2.2% y-o-y contraction in the second quarter versus -4.4% expected by analysts and the manufacturing PMI, 45.2, revealed a softer slowdown in activity in July.

Meanwhile, Caixin’s Chinese manufacturing PMI printed 52.8 in July, the highest figure on record, surpassing the market expectation of 52.3 as post-Covid recovery in activity gained momentum. 

The ASX 200 (-0.31%) lagged however despite a solid manufacturing PMI read, as energy and mining stocks fell on softer oil and commodity prices.

Elsewhere, losses were dominant. Stocks in Philippines led losses with a 3.58% drop on Monday as authorities ordered stricter lockdown in Manila. 

European and US stock markets are poised for a flat start to the week, as investors await manufacturing and services PMI on Monday and Wednesday, the Bank of England (BoE) rate decision on Thursday and the US jobs data on Friday. 

Strong rebound in Western economic activity should better the investor mood this week, even though the short-term direction will likely remain blurred by the persistent Covid threat and global trade tensions. The US is expected to announce new measures on a broad list of Chinese-owned software companies which threaten the US national security in the coming days. 

But price retreats are still interesting dip-buying opportunities for investors chasing new highs in US stocks. The S&P500 remains bid above the 3200 mark and there is nothing stop the Nasdaq from rebounding above the 11000 level and renew record.

In the UK, the downside correction in oil could be a threat for the appetite and limit the topside near the 6000p, while the strong sterling seems to have a marginal negative impact on FTSE demand at the moment. 

The US dollar is better bid on Monday and the 10-year treasury yield rose near 0.55%. Fitch maintained the US long-term debt at AAA but downgraded the outlook from stable to negative. But the deteriorating US debt outlook didn’t have much impact on US sovereign appetite as the rising sovereign debt levels increases the global default risk and the US debt, though riskier, is still considered the safest across the board.

The recovery in US dollar triggered decent profit taking in EURUSD, pulling the pair to 1.1740 at the start of the week. The downside correction could extend another figure to the 1.1630 mark, the minor 23.6% Fibonacci retracement on April – July rebound.

Pound bulls will likely lose strength above the 1.30 mark, as the medium-term outlook for sterling remains negative on lingering Brexit risks. Therefore, the slightest improvement in US dollar appetite could send Cable to 1.30/1.28 range, while sterling will likely struggle to defend its advance against the single currency. Solid buyers are touted near and below the 0.90 in EURGBP. The Bank of England (BoE) is broadly expected to maintain the policy rate and its asset purchases unchanged at this week’s MPC meeting, however investors expect 70-billion-pound rise in sovereign purchases in November or December. 

Gold consolidates gains above the $1970 per oz. A further rise towards the $2000 is possible, but gains should remain short-lived due to overbought market conditions and signs of a possible return to the US dollar. 

Softer global risk appetite and increased downside pressure on global oil demand has been preparing the ground for a slide below the $40 per barrel in WTI crude. Encouraging manufacturing data should slow down the softening in oil prices, but even signs of economic recovery will unlikely prevent a downside correction below the $40 mark as the premature tapering of the OPEC production cuts increases the worries of a higher global glut in the coming months.