Market news 5 October 2020

Chinese data signalling strong post-Covid recovery

• China’s industrial profits remained strong in August, rising +19.1% year on year. Profit margins improved from 6.1% to 6.9% over the year and industrial revenue growth increased +4.9% over the year.

• China’s PMIs surprised to the upside in September, indicating that the economic recovery is broadening. The official manufacturing PMI increased from 51.0 to 51.5 as export orders turned expansionary for the first time this year. The private sector Caixin manufacturing PMI held close to 10-year highs at 53.0, whilst the non-manufacturing PMI rose to 55.9, led by hotel/catering and telecoms services.

Business surveys in Europe and the US stall whilst euro inflation dips to worryingly low levels; on the other hand, US consumer confidence rebounds robustly

• The US ISM manufacturing survey declined from 56.0 to 55.4 in September, missing expectations for a small increase. New orders fell from 67.6 to 60.2 over the month and the employment component remains extremely weak at 49.6.

• The September euro area manufacturing composite PMI was left unchanged from the flash estimate at 53.7, with the four major country indices as follows: Germany 56.4, France 51.2, Spain 50.8, Italy 53.2.

• German inflation declined for the third consecutive month in September to a new 5-year low, with the HICP measure at -0.4% yoy, albeit that the weakness was exaggerated somewhat by temporary VAT cuts (worth -0.9% on the headline number), which will be reversed in January. Nevertheless, this disinflationary impulse will further cement the ECB’s dovish stance.

• US consumer confidence surprised markedly to the upside in September, rising +15.5pt to 101.8 (consensus: 90.0). The labour differential (percentage of respondents saying jobs are plentiful less percentage saying jobs are hard to get) increased by 5.1pt to 2.9. 

Equities choppy but the decline halted for the moment

• Equities arrested their recent descent and managed to post modest gains over the week. Of note was the recovery in Value, with banks stocks outperforming and the Russell 2000 small-cap index noticeably stronger than Nasdaq over the week.

• Analogously, “risky” FX (EMFX generally and Antipodean, Scandis and Sterling within the G10 outperformed havens USD, CHF and JPY, with precious metals also recovering somewhat.

• Weakness in sterling investment grade credit spreads was also largely reversed, even as the Bank of England concluded the £10bn corporate bond purchase programme it commenced in response to the Covid crisis (with the £10bn purchase after Brexit, this takes BOE corporate bond holdings to £20bn in total).