Stock index futures gapped higher overnight, while copper prices and risk-sensitive currencies such as the Australian dollar also rose in response to the latest Chinese data, which pointed to a surprise rebound in activity at the world’s second largest economy. The positivity has carried forward to Europe where the markets were sharply higher at the time of writing, despite the release of some mixed-bag data here. Given the large gaps in futures and the not-too-significant rebound in Chinese PMIs (see below), one could argue that the markets may have overreacted and so we could see the indices retreat to fill their voids once Wall Street opens for trading later.
Both the official (50.5) and Caixin (50.8) manufacturing Purchasing Managers’ Indices (PMIs) for China rose above the boom/bust level of 50.0, thanks mainly to a pickup in domestic demand. This comes after a poor set of Eurozone PMI data had unnerved investors a couple of weeks ago. In fact, some of those numbers were revised even lower with the Final German manufacturing PMI, for example, coming in at 44.1 this morning versus 44.7 previously. The French PMI was also revised lower, while Spain managed to beat expectations. However, the UK Manufacturing PMI easily beat expectations at 55.1 vs. 51.2 expected and 52.1 last. More data is scheduled later from the US, with retail sales and ISM manufacturing PMI being among the highlights.
As we had highlighted previously, for example HERE, the downside for equity indices did in fact prove to be limited following the latest pullback, as the falling government bond yields boosted the appeal of the higher-yielding stock markets. However, while the short-term path of least resistance continues to be to the upside, it remains to be seen whether stocks can push significantly higher from here. It could be that the bond market rally (one of the main drivers behind the latest stock market rally) may have ran its course and could pull back now that all the major central banks have laid out their near-term interest rate projections. Yields may struggle to push lower without further deterioration in incoming data. Perhaps a big test for the markets will come in the form of US jobs data on Friday. Last month, the employment numbers were very poor, although the dollar and stocks held their own well due to the fact wages rose more than expected.