European markets are trading sharply lower while traders are focusing towards the economic data which was released overnight in China. It was very stimulating to see the volatility propping up last night during the final few hours of the U.S. trading session and the reason behind that was very obvious- investors could smell more blood. As per their expectations, both the manufacture PMI data and the Caixin index data have printed the kind of headlines which will draw more blood during the European session.
The manufacturing PMI data is the measure of large state owned firm and the reading not only fell short of expectations, but it also dipped into a negative territory and this makes the headline which traders certainly do not like at all. The slump is also seen in the small and medium size business and this paints a very disappointing picture which reflects that both big and small firms are craving for growth. If both small and large size firms are struggling, then where are we going to see any sign of growth?!
The fact is that it is not that the People Bank of China is mute to the economic data and there have not been any counter reactions to charge the economy. It takes time for these measures to show their colour and as long as the central bank stays behind this and keep on taking appropriate steps, we believe there will be light at the end of this tunnel, but it may just take some time to see that.
Another fact which should not be surprise the investors in the future is the downward revision of the GDP growth forecast for the country, which currently the PBOC thinks it will grow at a rate of 7%. If and whenever the PBOC revise that down to a more realistic target, we believe that will be a good news for the economy as the county will be able to meet those targets very easily and investors will feel more confident in their efforts.
There may not be any surprise if we break the lows of the Dax index, which we experienced last week or at least retest those levels once again. According to the Dow theory, the lows which are in place will be tested again soon and if the Dow Jones index will retest those levels, then surely we will experience some blood bath on this side of the Atlantic as well.
The saga of the manufacturing index will continue in Europe as well. Italy and Spain are both expected to post some solid numbers which will be a great news for Mr Draghi, who will be holding his press conference later in the week. On the other hand, the same economic data may echo the views of the country’s prime minister who has vowed to take more structural reforms to boost the growth.
As for the UK, the manufacturing PMI data are expected to match the forecast of 51.9. A positive reading will make the sterling more strong which has been under pressure more recently. While the U.S. ISM manufacturing PMI data is due later this afternoon and the forecast of for 52.6 while the previous reading was at 52.7. The data will provide an important clue for the upcoming U.S. Non farm payroll number which is due coming Friday.