China: Be Sure To Read Between The Lines

by: Dean Popplewell

By Dean Popplewell

There is a gap and it's not going to be filled anytime soon. At first glance things look good, but during the second a different story can be told. China's manufacturing Purchasing Managers Index rose 51.4 last month, up from 51.1 in September, indicating expansion and beating market expectations. If one digs deeper however, a sizable gap between large and small manufactures begins to show, with the latter reporting a contraction in activity.

On the face of it, this would suggest that the positive momentum that drove the fourth consecutive monthly manufacturing increase is "unbalanced." The global economy, and especially the APAC region, requires China to be recording stable growth, even more so after a soft first half to this year. Declining orders suggests "domestic and external demand may have moderated somewhat after a nice rebound in previous months."

Questionable growth tends to have a negative impact on regional bourses and the Nikkei 225 is no exception. Japanese equities close this week out on the back foot as the yen firmed against the US dollar before the Stateside trading session. The lack of clarity surrounding PM Abe's structural reform policies (Third Arrow) seems to be having an effect on foreign investor interest.

Overall, the market is short yen and the IMF this week supports Abe's policies. These shorts will have to rely on the dollar to move higher and not on the yen to move lower. Natural US dollar demand against the major currencies has pushed the CNY lower on Friday. Expect to see some cautious Yuan trading next week ahead of an important Communist conclave starting post-NFP.