Manufacturing trumps stock fears

Yesterday was the worst first trading of the year for stocks in over 10 years as declines on the Chinese stock market dragged global bourses lower. Risky currencies were sold also, as investors flooded into havens offering the protection of a current account surplus. The yen and the euro have long been held as ports in storms for investors and that was seen once again yesterday.

The euro was helped by a stronger manufacturing sector PMI reading than most had expected, with the new orders component – a decent indicator of future demand – rising in Germany, France, Italy and Spain. The same could not be said for the manufacturing sector here in the UK, however, which slumped in December to the lowest level in three months.

Similar noises have been heard from other manufacturing surveys in the past month; it is not a stretch at all to say that low commodity prices, weakness in export markets and a still resilient sterling are all unlikely to allow 2016 to be particularly fertile for the UK manufacturing sector. The other side of this coin, however, is that what is bad for the manufacturing sector is good for the consumption side of the economy; with one making up 15% of UK GDP and the other contributing 75% which would you rather see backed?

A similar story was evident in the US measure that dipped into contraction in December and to the lowest level since June 2009.

Money continues to leave China

Overnight in Asia, the situation has quietened somewhat, courtesy of an injection of liquidity by Chinese authorities. Capital outflows – or money leaving China – have remained at high levels since the August 11th devaluation of the yuan and the People’s Bank of China has continued to guide the yuan to ever weaker levels versus the USD.

In the meantime, we are expecting a further, gradual weakening of the yuan as far as 6.80 in USDCNY terms.

As onshore yuan has weakened, divergence between onshore and offshore CNY has moved to around 2%. This is a clear sign of additional capital flows with yuan depreciation still seen in forward markets – the 12 month price in USDCNY is 6.8800, 5.5% higher than current spot.

Eurozone inflation raises ECB stimulus hopes

EURUSD is moving lower and dragging GBPSUD with it this morning in the lead-up to today’s Eurozone inflation number. Yesterday’s figure from Germany disappointed as falling food prices offset higher energy prices; a similar outcome through the Eurozone will ensure that market expectations of a 0.4% year on year reading are missed, weakening the single currency further. The figure is due at 10am.

The Day Ahead

Sterling remains in a rather dour mood as we open up in Europe as it battles EU referendum fears and a downturn in economic data. The PMI for the construction industry is due at 09.30 today and while the warm weather may have helped keep sites open through the month, we are unsure as to the impact widespread flooding may have caused. It will likely stoke demand as areas dry out but may have stymied efforts initially.

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