Chinese Manufacturing Continues to Contract

Analisi Giornaliera - 23/06/2015

Key Manufacturing Gauge Improves Modestly But Remains in Negative Territory

The impact of looser monetary policies have translated to a floor for the weakness in manufacturing as Chinese figures showed output trending closer to expansionary territory after contracting since March. The uptick in manufacturing was not enough to completely reverse the slide in stocks which have seen some benchmarks slip into bear markets.

China Manufacturing Improves

After months of policy moves intended to loosen liquidity conditions and drive investment, the People’s Bank of China is starting to show results in the manufacturing sector which saw a surprising uptick over the previous month. The China HSBC Manufacturing PMI released overnight showed an improvement but nevertheless remains in contraction below 50 threshold, printing at 49.6. Although some suggests it marks stabilization, at the end of the day it is more indicative that manufacturing is not contracting as quickly due to the massive easing efforts undertaken by the Central Bank in recent months. Meanwhile, Chinese stocks are continuing to decline, with certain benchmarks trading in bear market territory with many indices at the lowest levels in 7 weeks. Increased scrutiny of margin in brokerage accounts insinuates that much more downside could be realized after transaction volumes tumbled. The Shanghai Composite continues to swing between gains and losses.

Existing Home Sales

According to the National Association of Realtors (NAR), existing home sales rebounded 5.10% after falling -2.30% in the prior month. Larry Yun, the Chief Economist at the organization when asked about housing prices remarked “this is clearly not a bubble.” Rewind back to 2006 and he made similar comments about the state of the American housing economy amid what was the beginning of annual price drops. Right now, median home prices are creeping towards that same 2006 high that led right up to the last collapse in home sales and eventually housing prices. While the organization is notoriously overly-optimistic, the latest numbers should be viewed as a cautionary tale considering the NAR’s storied history of weak forecasting. Stocks responded positively with the Nasdaq Composite hitting new record highs while the dollar reversed higher against peers.

Greece Interested in Extension

Not many new details were proffered in yesterday’s reform proposal submission from Greece aside from VAT and early retirement reform despite the optimism espoused by European leaders that a deal was approaching. Greece has in the meantime after discussions with the ECB decided that an extension of the current bailout program would be beneficial for the nation as it seeks to postpone repayments while unlocking further tranches of bailout capital. Already, the ECB is drawing the ire of both Germany and Ireland with the nations demanding that the European Central Bank halt emergency lending assistance to Greece amid the mounting commitment to capitalize the insolvent banking system. With deposit outflows topping over EUR 2 billion between Friday and Sunday, Greek banks are bleeding capital at a record pace and are assured to run out of collateral shortly with GDP exceeding bank deposits. EURUSD has fallen over 100 pips from yesterday’s highs as traders sell the news.

WTI Crude Oil Descending Triangle Technical Pattern

Crude oil prices remain volatile despite the ongoing consolidation in prices as the range between highs and lows tighten. Declining inventory draws and fairly stable production with emphasis on the ability to increase output has put a cap on any further rally in prices as WTI has difficulty in overcoming recent multi-month highs in spite of the plunging rig count. The descending triangle pattern in the WTI benchmark has a bearish bias with the consolidation occurring between a near-term downtrend and support line at $59.33. A move below the support level could indicate a downside breakout to be accompanied by renewed downward momentum in crude prices. However, a move above the trendline could signal a breakdown in the pattern and potential reversal in prices to the upside.