2 September 2013: Markets buoyed by manufacturing data out of China
Markets are trading higher this morning, the JSE up +350 points on Fridays close. The US holiday presumably means quiet trading conditions and a limited reaction to the data releases that we see out of Europe. Cappings continue to look attractive over the medium to longer term, while the Quantum portion of the QPSA still offers an impressive 13% for the 12 months. The strategy of coupling the QPSA with a 36 month CAI or PII is still our strategy of choice, combining enhanced yield with potential equity returns of 24% (CAI) or 38% (PII) respectively.
The UK manufacturing PMI is the main release and, perhaps not surprisingly, it’s seen rising again. The consensus for this month is for an increase to 55 from 54.6. We think the risks lie to the upside. The euro zone flash PMI for August shot up from 49.8 to 51 (we get the final figure today) and our sense is that business confidence in the UK is recovering more quickly than in the euro zone. Hence we’d not be surprised at all if today’s August PMI in the UK is stronger than the consensus figure, which only anticipates a modest rise. This being said, the market may not be too shocked by strong data. We’ve seen a very good run of data that’s bettered expectations in recent months and it probably implies that the market will be much more sensitive to weaker-than-anticipated numbers, perhaps especially given that the BoE, under new Governor Carney, is still threatening to ease policy again if the recovery falters. At some point it is inevitable that market expectations for economic data will ‘catch up’ and we won’t see so many numbers beating the consensus. When this happens interest rates could slip back, alongside the pound.
A delay in tapering might be expected to help treasuries—as could a US-led attack on Syria. But we still find it hard to become enthused about treasuries. Tapering is still going to happen—only the timing is in question. Of course, if an attack on Syria creates absolute carnage in political relations, stocks—and growth prospects—it would be different. But this is not our central scenario. Another point is that the EM crisis is hurting overseas central bank demand for treasuries—as we saw again last week in the auctions. All told, we still think that 10-year treasury yields will have a 3-handle before the end of the year whether the Fed delays tapering or not.
Today sees the release of manufacturing data across the globe. China’s official manufacturing PMI, released this morning increased to a sixteen month high, from 50.3 in July to 51.0 in August. Meanwhile, the HSBC/Markit measure ended a string of three consecutive declines, increasing from the 11-month low of 47.7 recorded in July to 50.1 in August. The combined average of the two figures is now above the 50 threshold for the first time since May. The prints suggest that sentiment in China’s manufacturing sector has improved for second consecutive month. The better-than-expected official China PMI print is supporting equity markets in Asia and adding support to EM currencies in general including the rand.
On the local front we expect a fractional moderation in the PMI in August from the improvement seen in July. The July PMI print was defiant in its 0.6 pt improvement to 52.2 pts, despite the challenging environment faced by the manufacturing industry (which has most recently manifested itself in a sharp deceleration in y/y growth in manufacturing production for June). July’s PMI print was once again buoyed by the New Sales Orders sub-component (which carries the highest weight in the PMI of roughly 30%), aided by persistent currency weakness. SA vehicle sales data today. Vehicle sales growth exhibited lingering resilience in July, accelerating to 7.5% y/y from a subdued 3.2% y/y print in June, which we expect to have waned in August. Year-to-July 2013 sales were up 6.9% y/y, roughly in line with NAAMSA’s prediction for 6.5% growth in overall vehicle sales in 2013.