31 Jul 2013
Chinese PMI looms as traders distracted with FOMC & Europe
FXstreet.com (Barcelona) - While Wednesday’s focus will be on European CPI, German unemployment, US GDP and the FOMC’s rate decision, perhaps the biggest global market mover this week is set to come in the form of China’s purchasing managers’ index Thursday.
Chinese economy still potentially the first and biggest domino
From the perspective of keeping the equity party going in the US, finding out whether the Fed will keep buying bonds at the current rate is clearly important. For that matter, so is anything that may push them in one way or another – like Friday’s monthly US employment report. Investors in the U.S. have been enjoying the “Tepper Trade” – named after famed hedge fund manager, David Tepper, who very publicly put forth the investment thesis bad economic news means “Bennie and the Jets” keep their collective feet on the gas pedal while consistently good news might mean the economy and market will improve on their own. The key to The Tepper Trade is that in either case, theoretically stocks will be on the rise. The Tepper Trade has clearly been in full effect in Europe as well (with the ECB playing the role of Benny...) recently.
However, in terms of true economic growth that exceeds the modest sub-2% rates in the US and anemic rates in Europe, China is clearly the “straw that stir the drink”. As an example, the lower-than-expected HSBC Services PMI number last week sent the Pacific region currencies lower immediately – some of which have yet to recover.
Thursday’s HSBC Manufacturing PMI has the potential to affect more than just the currency markets (although the effects there will be severe if a surprise in either direction occurs). It could further deteriorate the base and industrial metals markets and ratchet down corporate earnings and sovereign GDP estimates globally. Of course, a better PMI number would have just the opposite effect on things – so betting heavily (especially in currencies) in either direction ahead of the data seems to be little more than an expensive roll of the dice.
Traders of AUD, JPY and commodities most affected
Clearly, China’s neighboring countries will be the most affected by Thursday’s PMI release. However, any severe surprise in either direction will cause a global ripple effect – at least temporarily. Any and all Asian currencies will surely be on the move (in either direction) following the announcement - and depending on the severity of the surprise, if any, so will the regional equity markets.
Additionally, an already weak metals marketplace could lose its footing altogether. Copper as an example is rapidly approaching its recent lows just below $3 – not to mention the carnage in the other industrial metals. A better PMI number from China Thursday will cause a serious short-covering rally while a poor number may cause a break of technical support and force a flurry of stop-losses on the downside.
The bottom line
The big picture is that the world pretty much knows the financial steroids game the FOMC and ECB are playing – as evidenced by The Tepper Trade that has been in play over the last few years. What the world is less clear on is what will come from China next in terms of data and policies – which makes for added volatility potential and that rightly will have the attention of global market watchers Thursday.
Chinese economy still potentially the first and biggest domino
From the perspective of keeping the equity party going in the US, finding out whether the Fed will keep buying bonds at the current rate is clearly important. For that matter, so is anything that may push them in one way or another – like Friday’s monthly US employment report. Investors in the U.S. have been enjoying the “Tepper Trade” – named after famed hedge fund manager, David Tepper, who very publicly put forth the investment thesis bad economic news means “Bennie and the Jets” keep their collective feet on the gas pedal while consistently good news might mean the economy and market will improve on their own. The key to The Tepper Trade is that in either case, theoretically stocks will be on the rise. The Tepper Trade has clearly been in full effect in Europe as well (with the ECB playing the role of Benny...) recently.
However, in terms of true economic growth that exceeds the modest sub-2% rates in the US and anemic rates in Europe, China is clearly the “straw that stir the drink”. As an example, the lower-than-expected HSBC Services PMI number last week sent the Pacific region currencies lower immediately – some of which have yet to recover.
Thursday’s HSBC Manufacturing PMI has the potential to affect more than just the currency markets (although the effects there will be severe if a surprise in either direction occurs). It could further deteriorate the base and industrial metals markets and ratchet down corporate earnings and sovereign GDP estimates globally. Of course, a better PMI number would have just the opposite effect on things – so betting heavily (especially in currencies) in either direction ahead of the data seems to be little more than an expensive roll of the dice.
Traders of AUD, JPY and commodities most affected
Clearly, China’s neighboring countries will be the most affected by Thursday’s PMI release. However, any severe surprise in either direction will cause a global ripple effect – at least temporarily. Any and all Asian currencies will surely be on the move (in either direction) following the announcement - and depending on the severity of the surprise, if any, so will the regional equity markets.
Additionally, an already weak metals marketplace could lose its footing altogether. Copper as an example is rapidly approaching its recent lows just below $3 – not to mention the carnage in the other industrial metals. A better PMI number from China Thursday will cause a serious short-covering rally while a poor number may cause a break of technical support and force a flurry of stop-losses on the downside.
The bottom line
The big picture is that the world pretty much knows the financial steroids game the FOMC and ECB are playing – as evidenced by The Tepper Trade that has been in play over the last few years. What the world is less clear on is what will come from China next in terms of data and policies – which makes for added volatility potential and that rightly will have the attention of global market watchers Thursday.