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Dreadful data from China but stocks rebound on stimulus hopes

The official Chinese manufacturing and non-manufacturing reports were posted over the weekend, and they were nothing short of dreadful. 

The manufacturing PMI slumped to 35.7, from 50 in January – it was the lowest level on record. The non-manufacturing level was 29.6, which was a slump from the 54.1 registered in the previous reading. The level of activity was below that of the financial crisis. The shocking reports hammer home the view the global economy could undergo a sizeable economic cooling. China is the workshop of the world so when they undergo a huge shock, the ripple out effect will be big.  

Overnight the Caixin survey of Chinese manufacturing was posted and the reading was 40.3, while the consensus estimate was 45.7, and keep in mind the previous reading was 51.1. The level was nowhere near as bad as the official level, but it was the worst on record.                  

Stock markets in mainland China, Hong Kong as well as Japan are higher as traders are hopeful there will be coordinated approach to by central banks and governments to tackle the crisis. Dealers are optimistic the US, Australian and the Japanese central banks will loosen monetary policy to try and alleviate the crisis. European equity markets are tipped to open higher on the back of this optimism too.    

Last week was a horrendous for the markets, for many instruments it was the worst five day run since the financial crisis over a decade ago. The rising number of infections in Europe sparked fear among traders that this part of the world could face lockdowns similar to those seen in China. A raft of companies scrambled to warn about missing targets on account of disruption to their businesses.   

Stocks markets in Europe plus the US had a horrible time as dealers dumped equities as the fear factor took hold. There were serious concerns the health crisis would spread and in turn economic inactivity would skyrocket – on the back of potential lockdowns.

The health situation in China is still bad but the government appears to be getting a better handle on the crisis. Given how the Chinese state operates, it is easier for the Beijing authorities to clamp down on the situation than it is for Western governments, so should the health crisis deepen in Europe, that impact could be far greater on the respective economies.

The Italian economy contracted by 0.3% in the last quarter of 2019, so in light of the coronavirus fears, you can see why traders are worried about the possibility of a recession hitting. Italy’s banking system is fragile as it is, the last things it needs is an increase in bad debts. Over the weekend it was announced the Italian government will launch a €3.6 billion investment plan to assist the economy during the health emergency.  

The Dow Jones and well as the S&P 500 closed in the red on Friday but both indices finished well off the lows of the session. The NASDAQ 100 managed to finish fractionally higher, which could be seen as a positive sign too.

It wasn’t just stocks that took a battering last week, commodities took a hammering too. WTI as well as Brent crude fell to levels last seen over one year ago. Copper plus platinum suffered losses too. The declines were also driven by the fears that worldwide demand will dry up and economies could come to a grinding halt. Even palladium endured a vicious fall on Friday, and that metal was largely immune to the madness of last week’s moves.

The US dollar index dropped off greatly last week on chatter the Fed would cut rates a few times in 2020 in a bid to aid the economy from the potential fall-out of the health crisis. Late on Friday, Jerome Powel, the Federal Reserve chief, said the US economy was strong, but the ‘evolving’ health emergency posted a risk to growth and he left the door open to cutting rates should it be required.

Sterling saw big volatility last week on the back of the UK government’s declaration it would be prepared to walk away from the negotiating table if the EU aren’t willing to be reasonable when it comes to brokering a post transition-period deal. Even though a no-deal scenario would be harmful for the UK as well as the eurozone, dealers took the view the British economy would be damaged more in that outcome, hence the push higher in EUR/GBP last week.      

The major economies of Europe will announce their final readings of manufacturing PMI for February between 8.15am (UK time) and 9.30am (UK time). Spain, Italy, France, Germany and the UK will release their numbers, and economists are expecting 48.9, 48, 49.7, 47.8 and 51.9 respectively.

The UK mortgage data will be posted at 9.30am (UK time). The approvals reading is tipped to be 67,900, while the mortgage lending level is expected to be £4.7 billion.    

The US will announce the final reading of the manufacturing PMI report, as well as the ISM manufacturing update, and the consensus estimates are 50.8 and 50.5 respectively. The numbers will be released at 2.45pm (UK time) and 3pm (UK time) respectively.       

EUR/USD – rebounded late last month and if the bullish move continues it might retest the 200-day moving average at 1.1100. A move back below the 1.0900 zone might pave the way for 1.0777 to be targeted.

GBP/USD – has been pushing lower since late January and further losses might target 1.2695, the 200-day moving average. A rebound might encounter resistance at the 50-day moving average at 1.3020. 

EUR/GBP – rallied from mid-February and while it holds above the 100-day moving average at 0.8518, the outlook should stay positive, and it might target 0.8676. A move below the 0.8400 zone should bring 0.8276 into play.  

USD/JPY – is in a sharp down trend and a break below 107.65 might put 107.00 on the radar. The rebound overnight might suggest a wider turnaround in sentiment. A retaking of the 50-day moving average at 109.59 could open up the possibility of 110.00 being targeted. 

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