Daily analysis 04.01.2016:
Weak data from China cause a significant sell out on the local stock exchange and the worst pricing of the yuan in 4 years. However, didn’t the market overreact, recalling the events from August? The zloty is significantly weaker in comparison to the closing on Friday. The PMI in line with forecasts.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 14:00 Initial inflation data from Germany (survey: +0/6% y/y).
- 16:00 The US industrial ISM report (survey: 49 points)
- 05.01.2016 11:00 Initial inflation data from the Eurozone (+0.4% y/y, +0.2% m/m, excluding food and fuels +1.0%).
Did the Chinese market overreact?
The first day of trade on global markets is characterized by an increase in volatility. The Chinese stock exchange lost 7% of value, the European stock exchange – 2-3% and the contracts on S&P are at minus 1.5%, whereas the currencies of the emerging markets, from the Korean won to the Polish zloty lost about 1% of value. What caused such a commotion? In order to explain this, we should go back to January 1, when the National Bureau of Statistics published the official readings of the preceding indexes for the Chinese industry and services, which were at respectively 49.7 and 54.4 points.
The basic features of the industry were relatively good – production rose to the level of 52.2 points from 51.9, and new orders went up from 49.8 to 50.2. The readings from the services sector were even better, having reached the highest level in 16 months. Therefore, the Shanghai stock exchange in the beginning of its session got only official, positive data.
It was after the beginning of trade and fall by approximately 0.7% where the PMI indexes prepared by Markit and Caixin came in and showed the worse situation in industry when compared to November and loss of the fall of the Purchasing Managers Index from 48.6 to 48.2 with the Bloomberg consensus at 48.9.
The description of this situation prepared by Markit and Caixin was pessimistic. The survey of the businessmen show fall in production, low demand locally and abroad and the reduction of the export orders for the first time in 3 months. Additionally, the producers decreased the employment due to expenses cuts.
After publishing the report, the indexes on the Chinese stock exchange already fell by 4% and after 1.5 hour break, when the afternoon session on the Shanghai Composite began, fell again by 5% and now, according to new guidelines, the quotations have been stopped for 15 minutes. After their resumption the sell off continued by 2 percent points and the session was ended due to reaching the level of 7 percent.
However, were the data really that bad to cause such panic? Probably not, but the investors recalled the events from the last year’s summer, when the index fell by 30% in a month and a half, and then the sell out went deeper by another 10%. The memory of it increased pressure on getting rid of the stock. Moreover, in just a couple of days the ban to sell larger packages of stock caused by the pricing crash on the capital market (introduced in July) is supposed to be lifted.
Also yuan continued its falls and probably also recalled the situation from a few months back, when the overprice of the Chinese currency caused concerns regarding the shape of the global economy. The pair USD/CNH (yuan priced outside of continental China) went above 6.6 and reached the highest levels in 4 years.
To sum up, the reaction to the data was significantly more dramatic than it could be expected, especially taking into consideration the publications from NBS from the services and private sectors. Another important reading is the services PMI data from Caixin and Markit. If they are close to readings from last month (51.2), then the situation should slowly stabilize.
The foreign market in few sentences
The behavior of the Chinese market overshadowed some other issues, like the tension in the Persian Gulf and the statements from the Fed representatives. However, if the situation in China isn’t settled in the next few days, then matters concerning the macro data and the perspectives for the monetary tightening in the US should gather much more attention. It is not excluded then that today’s significant growth of the EUR/USD on the wave of worsening of the global sentiment will be quickly reduced and the readings of the macro data from over the ocean will take the initiative and cause the fall of the main currency pair to the level of 1.08 by the end of the week.
The overpriced zloty
The zloty reacted negatively to the overprice of the stock in China and sell out on the capital markets of the developed countries. The EUR/PLN was reaching the level of 4.30 before the noon, and the CHF/PLN exceeded 3.95. Similarly to the global market, the reaction is probably exaggerated and the days on the zloty should be calmer.
Today’s PMI reading from Poland causes lots of commotion. The industrial preceding index remained on the level of 52.1 point with the consensus at 52.3. In the survey of the entrepreneurs’ opinions Markit’s senior economists Trevor Batchin wrote: “The main positives were stronger growth of output and employment. New order growth disappointed, however, raising a question mark over the performance of the sector at the start of 2016.”
The end of the session over the ocean will be important for the zloty in the coming hours. In the days to come the domestic currency will follow the news from China – especially the Wednesday’s services PMI report from Caixin and Markit. However, there’s a big chance that the wide market overreacted to the jeopardy from China and by the end of the week the EUR/PLN might return to 4.25.
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