A relatively busy week for Chinese data releases kicked off with the final number from HSBC’s Manufacturing PMI report getting released overnight, with the report sinking lower than the flash reading had initially estimated. The final print of 48.1 was the fourth consecutive month of contraction for purchasing manager activity according to HSBC’s survey, and the longest streak since October of 2012.
Later in the week we’ll get Trade Balance numbers along with the most recent reading on consumer prices for the Chinese economy, both of which are likely to remain muted as the government endeavors to navigate the economy towards a more sustainable growth trajectory. Last month’s dramatic fall in both imports and exports is expected to stabilize somewhat, although the tepid growth in imports provides additional problems for companies that has anticipated export growth to China increasing. This is especially important for commodity-intense economies like Canada, having to look for alternative markets to export their offerings as the Chinese government remains reluctant to induce a credit-fueled economic revival.
The overnight Asian session was largely subdued due to the observance of the Children’s day holiday in Japan, although Chinese stocks did move lower after the worse than expected PMI numbers with the Hang Seng shedding 1.28%.
While economic activity remains stagnant in China, the situation in Ukraine has intensified over the weekend, with at least 42 pro-Russian supporters were killed in a burning building during a protest. The riots in the Black Sea port of Odessa that ended in what is easily the worst clash since the initial riots in February began, sparked retaliation outrage across other areas in Eastern Ukraine, causing the government to step up efforts at quelling the growing outrage from the pro-Russian supporters. The conflict has now escalated to the point where the country appears to be on the brink of an all-out civil war, while the West calls on Russia to do more to help de-escalate the crisis. The decision of Ukraine to go on the offensive to uproot insurgents from its eastern region has permeated a risk-off tone throughout financial markets this morning, with safe-haven asset classes catching a bid. The Japanese yen is gaining strength on the dash to safety, with USDJPY dipping below the 102 handle, while the yield on the 10-year US treasury remains depressed at 2.58%.
With little in the way of news flow during European trade given London being closed for the observance of May Day, the major bourses are underwater given the risk-off climate permeating through global markets. Not helping matters, the European Commission trimmed its economic growth forecast for the euro area and predicted that low inflation would weigh on economic activity for at least the next two years. The EUR is essentially unchanged against the big dollar heading into the North American cross, but the elevated level of EURUSD in the high-1.38s will definitely play a factor in whether or not the ECB looks to act on monetary policy within the next few meetings.
Heading into the North American open, equity futures are deteriorating along with investor sentiment, signaling a negative start to the new trading week. The escalating tensions in Ukraine have sent gold popping above $1,300/ounce as the yellow metal attracts safe-haven flows. Black gold is also attracting some bids before the opening bell, although enthusiasm is muted as price action for front-month WTI has stalled below $100/barrel.
The most notable data release for North American markets today is set to be released at10:00EST, and comes in the form of ISM Non-Manufacturing PMI for the month of April. On balance April has been a fairly strong month for the US economy, with robust job growth and decent PMI surveys giving market participants confidence the American economy is beginning to emerge from the winter doldrums that froze economic activity. Following on the heels of the ISM Manufacturing PMI last Thursday that saw purchasing manager activity increase to its highest level for 2014, the service sector is also forecast to replicate the strength seen in the manufacturing industry. Expectations are for the print to come in at 54.1, the highest level since November of 2013; anything around or above the 54 level would bode well for the big dollar, as the DXY mounted a few failed attempts of breaking out of the mid-79s last week.
Looking ahead to tomorrow and focusing on the Loonie, trade balance numbers for the Canadian economy over the month of March are set to be released. Forecasts are for very little change in February’s small surplus, with exports and imports remaining relatively unchanged for an overall surplus of $0.15bn. As discussed previously in this commentary, we feel that there are still some structural issues with Canada’s export-related businesses, and that there will need to be other catalysts than just a 10% decrease in the value of the Loonie to jump start that export-intensive sector of the economy. While we might see a slight upside surprise tomorrow in the numbers, it will likely be a few months before we see any meaningful momentum in export growth, which will be a by-product of a stronger economic recovery south of the 49th parallel.
aking a minute to focus on speculative positioning in currency markets, it is interesting to note that the bearish sentiment towards the Loonie continues to decline, with the CFTC COT report showing the net short position has declined to smallest level in six months. While this is good news for corporates that are naturally long the Loonie, it does provide warning signs should the Canadian economy fail to keep pace with the economic progression of its neighbour to the south. With traders squaring positions as USDCAD hovers around the 1.10 mark, should another catalyst emerge to drive USDCAD higher like the one back at the beginning of 2014, it will be easier for spec traders to establish new positions and drive the Loonie past the lows seen in mid-March, as the short CAD trade was notably over-crowded at that point.