Asia PMI’s A Mixed Bag, China Outperforms

We have had a veritable smorgasbord of Markit August PMI’s from across Asia released today, culminating with China’s Caixin August PMI, coming in higher at 50.4, back in expansion territory.

It was in contrast to the pan-Asia PMI releases earlier today that all came in lower than expected. The China release has mollified the earlier negative sentiment in Asian markets with Shanghai slightly higher in opening trade. The divergence in results though will leave lingering worries that the positive China result was an aberration.

Asia has a packed data calendar today before the week’s main events. We have rate decisions from Australia, Canada, Sweden and Europe on Tuesday, Wednesday and Thursday, followed by the U.S. Non-Farm Payrolls on Friday.

South Korea’s balance of trade for August showed a sharp deterioration to $1.72 billion this morning as did Japan’s capital spending for Q2. It plunged on a year-on-year basis to 1.90% against a consensus growth of 4.40%. Australia CommBank manufacturing PMI also disappointed at 50.90, continuing a grim run of data for the lucky country. It is, however, unlikely to swap the RBA into another rate cut tomorrow.

The Labor Day holiday in the United States is unlikely to reduce volatility in Asia and Europe, with plenty of weekend news and upcoming event risk for markets to get their teeth into. The next round of U.S. tariffs on imported Chinese goods, totalling some $112.0 billion, kicked in over the weekend. The 15% tariffs are unlikely to be felt immediately by U.S. consumers, and financial markets are preferring a more optimistic view that the U.S. and China will get around the negotiating table this month.

China’s attention was most likely on its stubbornly recalcitrant colony of Hong Kong over the weekend. Protests intensified once again after the arrest of some of the protest leaders. Police and protesters clashed in often violent confrontations, and once again the airport was severely disrupted. Markets are fretting on the increased likelihood of direct Chinese intervention and what that would mean for the future of one of Asia’s leading financial centres. The answer is, not good, to put it bluntly. The economic impact will surely show in Hong Kong data going forward and may temper the mood of equity traders in Asia as the new month begins.

Elsewhere the major parties in Germany survived state elections mostly intact despite anti-immigration parties making some ground. It could boost the Euro slightly today. Argentina imposed currency controls over the weekend to stem capital flight in a development sure to weigh on Latam capital markets.

In the U.K. Prime Minister Boris Johnson has threatened expulsion from the party and the loss of the whip for Tory MP’s who refuse to tow the Brexit line. Not being whipped is usually a good thing I agree, but in this case, it means losing party affiliation and becoming in effect, a stateless independent within Parliament. Following on from protests against the suspension of Parliament over the weekend, it could add to pressures on the Sterling as the week begins.

In summary, the commencement of the latest round of Trump tariffs on China will not be the main act today. The ongoing impact of the trade war on Asia and global growth though will be. The avalanche of tier one data and weather plus geopolitical turmoil ensures September volatility will begin as emotionally as August’s finished.

Equities

Month-end portfolio rebalancing flows dominated Wall Street on Friday with stocks giving up early gains despite U.S. personal expenditure data outperforming. The S&P 500 rose 0.05%, the Nasdaq fell 0.15% and the Dow Jones 0.15% giving a nil-all draw feel to the end of the week.

The Japan Nikkei and Australian ASX were already showing initial weakness following underwhelming data releases by both this morning. With little direction from Wall Street, Asia will probably concentrate on the effects of U.S. tariffs and the ongoing political troubles in Hong Kong.

Following a series of poor Markit PMI prints across the region today, The Caixin China PMI has lifted the gloom slightly as it printed an above consensus 50.4. The sentiment is likely to remain cautious in Asia, with the U.S. on holiday and so much political risk lingering.

Currencies

The Euro was the primary mover on Friday. The single currency fell 0.60%, sliding under 1.1000 to open at 1.0990 this morning. Traders shorting the Euro anticipating a significant cut or reintroduction of QE by the ECB on Thursday are likely to be disappointed. Looking at the price action on Friday, the move down had a month-end portfolio rebalancing look to it; thus, the sell-off should be taken with a grain of salt. More interesting will be if it can regain those losses this weak.

With a Labor Day holiday today, traders preferred safety first, and the dollar index rose by a respectable 0.35% to 98.85.

With a sense of nervousness hanging over Asia, the start of tariff-geddon part three, and a procession of negative news globally from the weekend, the U.S. dollar should remain firm. Haven currencies such as the Japanese Yen could outperform, with trade-sensitive currencies such as the Australian Dollar and regional Asian currencies most vulnerable to headlines or weak data during the session.

Oil

Crude oil fell on Friday as traders anticipated the landfall of Hurricane Dorian reducing demand for gasoline from Florida, Georgia and South Carolina. The hurricane has strengthened to a category five over the Bahama’s, and the uncertainty of its final path towards the United States should continue to weigh on futures markets.

Brent crude fell 1.0 % to $60.50 a barrel with WTI bearing the brunt of the hurricane concerns, collapsing by 2.90% to $55.00 a barrel.

Asia will be meteorologists today, with crude likely to fall if the path of Dorian marches towards Florida. Conversely, if Dorian is expected to miss the Florida panhandle and the Carolina’s, WTI in particular, could quickly recoup Friday’s losses.

Gold

Gold marked time on Friday as it awaited new developments on the trade front. Gold spot fell 0.30% to $1523.00 an ounce in subdued pre-holiday trading.

Gold has already retraced those losses this morning, rising 0.60% to $1530.00 an ounce as Asian traders weigh up events in Hong Kong over the weekend. With heightened geopolitical risks aplenty to start the week, gold should find plenty of willing buyers looking to hedge risk on any dips in prices today.