All in Asia

Once again, the story of today’s markets has almost already been written by movements in Asia. Another poor PMI reading from the Chinese economy alongside the news that North Korea has tested a hydrogen bomb has given markets the jitters, sending the USD higher against emerging and commodity currencies.

In China overnight, December’s Caixin PMI of the services sector fell to the second-lowest level in a decade. For those economists who had viewed the slowdown in China as a manufacturing move and not wider economy slump, then this news will be concerning.

It is easy to see that China is slowing down and it is especially the Old China (coal, steel, mining) that is slowing down. The world’s second largest economy is in the process of rebalancing but the slowdown in Old China is much faster than the rise in the New China (consumption, services, technology). This points to a wider lack of demand for commodities in the future that other emerging markets may simply be unable to replicate and this remains a risk for South Africa, Australia, Chile et al.

The devaluation of the yuan by the People’s Bank of China has continued apace as well. The central bank fixed the USDCNY rate for the day at a higher rate than had been expected, with traders expressing further bearishness through USDCNH. The spread between the two, the yuan traded onshore and offshore, is at its highest ever. This shows two very important dynamics – namely that further USDCNY weakness is expected by the markets and that the outflows from China into other markets is still at very strong levels.

Bombs away

The news that North Korea has allegedly tested a fusion bomb device is good news for nobody, and continued the sell-off in emerging market assets. Some experts are casting doubts on the country’s claims of developing and testing the device; whether they are telling the truth or not, further tests are unwelcome and will further pressure regional stocks and equities in coming sessions.

Services fears hurting GBP

GBP has not been affected by Korea, although Trident lovers may have wished it were. Despite a decent construction PMI number yesterday – driven by warm weather and an expectation of a pick-up in civil engineering work courtesy of the Christmas flooding – sterling is close to a nine month low versus the USD as we wait on the UK services PMI at 09.30.

As we highlighted on Monday, many UK watchers are worried that consumer spending in the UK has almost single handedly driven GDP in the past 12 months, and that a slowdown may be on its way. The expansion in consumer spending has been in part financed by lower savings rates and higher borrowing. Both are unsustainable in the longer run, especially in an atmosphere of higher interest rates.

Similar numbers are due from Europe this morning; Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00.

The Day Ahead

Tonight sees the release of the Federal Reserve minutes from December’s meeting that saw interest rates increased for the first time in nearly a decade. We will be looking to see whether the language of Fed members backs up the central bank’s thoughts of another 1 per cent of interest rate increases this year. The inflation and wage outlook is also crucial. The minutes are released at 19.00.

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