China making waves in a world with no reform

Local market had the usual month end pump to get profit taking into the close to deliver a positive day. Resources were negative after weaker than expected China data added to the rising regulatory reform risks. Size continues to matter as Micro Caps were the best while Large Caps were the worst. Tech and Property were the best sectors while Energy and Miners were the worst.

The main data points of the day were China PMIs. Manufacturing was weaker than expected but it stayed above 50 while Non Manufacturing fall into contraction (i.e. below 50). The official NBS Manufacturing PMI for China fell to 50.1 in August 2021 from 50.4 a month earlier and below market expectations of 50.2. This was the weakest pace of increase in factory activity since a contraction in February 2020, amid the Delta variant of COVID-19 outbreaks, higher material cost, and a campaign to reduce carbon emissions. Both output (50.9 vs 51.0 in July) and buying levels (50.3 vs 50.8) moderated, while there were declines in new orders (49.6 vs 50.9), export sales (46.7 vs 47.7), and employment (49.6 vs 49.6). On the price front, both input cost (61.3 vs 62.9) and selling prices (53.4 vs 53.8) went up at softer paces. Looking ahead, sentiment weakened for the sixth month in a row (57.5 vs 57.8). The official NBS Non-Manufacturing PMI for China plunged to 47.5 in August 2021 from 53.3 in the previous month. This was the first contraction in services activity since February 2020, dragged down by tough restrictions due to rising cases of the Delta variant of coronavirus, with new orders (42.2 vs 49.7 in July), new export orders (43.9 vs 47.7), and employment (47.0 vs 48.2) all shrinking at steeper rates. Prices data showed input cost inflation slowed (51.3 vs 53.5) while selling prices dropped for the first time in ten months (49.3 vs 51.3). Finally, confidence hit its lowest in seven months (57.4 vs 60.7).

The China data confirms our over all view that global growth is in decline while transient inflation remains persistently elevated. China continues to move on regulatory reform changes driven by reducing cost of living, more even distribution of wealth and breaking dominant industry players despite the damage to markets, growth and sentiment. China has made it clear that they think the West are sleep walking into a stagflation brick wall with no reform agenda and they are taking a different path. Change is never easy and is fraught with danger and uncertainty.

In a world driven by short termism with asset bubbles and very little reform, China moves to curb asset bubbles and big reform agenda may actually work in the long term. Australia continues to play geopolitics with China. China cares more about how they are seen within China than outside. They are positioning themselves to pick up the pieces after it goes wrong. Stagflation and recession risks can be ignored by Central Banks but not by the economy. It may be different this time!

Comments on US market last close…

US market had a choppy day with S&P higher and DOW lower. Pending home sales were down for the second month in a row. RUSSELL -0.49%, DOW -0.16%, S&P +0.43% and NASDAQ +0.90%. VIX slide lower to low 16. It was month end pump for tech and take profit on economic recovery stocks. USD ticked higher and Yields moved lower. Copper and Oil higher and Gold ticked lower. Property and Tech were the better sectors while Banks and Energy were the worst. Markets remain confused on US Fed as attention moves to Nonfarm Payrolls on Friday to set the sentiment into US Fed meeting in 3 weeks. Market will be trying to guess US Fed move into Sep meeting. We are in the month end pump.

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