A rather mixed 24 hours in markets. In our session, positive China PMI readings boosted risk appetite and saw NZD break 0.64 decisively. But a disappointing US ISM knocked markets back onto the defensive.
Both the official and Caixin China manufacturing PMIs beat expectations, with the latter’s improvement on its preliminary reading proving to be the market mover.
We’d caution that the absolute level still indicates subdued activity, and that the separate services survey slowed further. But the headline improvement carried the day, with AUD and NZD benefitting in particular.
The improvement in risk appetite flowed through to Asian equities, too, with benchmark indices posting solid gains.
European stocks opened higher as a result before leaking lower, a move accelerated by the miss in the US ISM report.
The headline index slipped to 50.2, signalled an effectively stalled US manufacturing sector. US equities slipped quickly to lows, with the S&P 500 down by 1.0%, but have since clawed back some of those losses.
Headwinds to the US manufacturing sector are well known: a stronger USD, and a weak global environment. We continue to think the strength in the non-manufacturing parts of the economy more than make up for weakness here, and will keep the Fed on track to raise rates in 2015.
NZD sheared through 0.64 on the back of the China PMIs, and looked to challenge significant resistance at 0.6460 before turning lower.
Chartists will be watching carefully to see whether NZD can close the NY session above 0.64. If so, another challenge of topside resistance will likely be mounted.
We continue to look for NZD outperformance in the near-term, but are wary of souring risk sentiment.
All eyes on the US employment reports tonight, then. The risks seem asymmetric – a soft reading seems more likely to evoke a strong (risk-negative) reaction.
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Raiko Shareef is on the BNZ Research team. All its research is available here.