Amid lingering fears around the health of the Chinese economy, investors continue to favour less risky bonds over stocks as equity markets in Asia relapse into a bout of pessimism. For the most part, the source of the current market angst in Asia is China, where Tuesday’s release of China’s official manufacturing index illustrated a slip in manufacturing activity. With the reading coming in at 49.7 as opposed to July’s neutral 50 figure even the official data coming out of China is starting to paint a picture of contraction in manufacturing. This news had the Shanghai exchange as well as broader Asian equity markets closing lower prior to the commencement of China’s four day long bank holiday. Responding to the news, the yen has resumed its role of Asia’s safe haven currency showing strength against its regional peers as well as the USD. Looking southward, both the aussie and kiwi dollars are showing signs of weakness as the abatement in commodity pricing continues and GDP figures in Australia came in at less than half the rate of growth as expected.
Moving onto Europe, the common currency is broadly higher against both its American and British peers as well as others as capital has shifted back to euro denominated assets. A large part of this flow has been driven by the unwinding of the euro backed carry trade as traders respond to the continuing volatility in risk assets by paring their positions. Surprisingly, the knock on the UK pound has been felt in its positioning against the USD as well as the euro. This is surprising because the sterling has been one of the best performing major currencies for nearly a year, driven in large part by the consistently solid employment, wage growth and manufacturing numbers put out by the British economy. With that said, this current positioning may be short lived astomorrow Mario Draghi of the ECB is set for a news conference, with many market participants expecting Draghi to hint at continued easing in the Eurozone as a salve to markets that have been buffeted by the uncertainty around global growth.
Oddly, yesterday’s confirmation that the Canadian economy was indeed in recession saw a spike in the value of the CAD versus its primary counterpart, the US dollar. This counterintuitive reaction was largely driven by a hardening of expectations that the Bank of Canada would not engage in a third rate cut before the end of the year, as data from the BoC confirmed that despite the contraction, both the labour market and wage growth are steady and depending on developments in the oil market and Chinese economy there remains room for a recovery in the second half of the year. Stateside, equity futures on the S&P signal a robust start to trading this morning despite an ADP non-farm payroll report that missed expectations. With the official number coming from the federal government on Fridaytraders have chosen to shrug off this near miss and instead are focused on the other signs of strength in the US economy as equities are currently poised to rebound from yesterday’s losses.
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