Bonds Jul 01

ATF indices remain steady amid strong PMI figures

China’s PMI figures beat forecasts, but weak external demand coupled with a resurgence in Covid-19 cases may weigh on recovery

ATF indices remain steady amid strong PMI figures
The ATF ALLINDEX China Bond 50, the flagship index, gained 0.03%.

(ATF) The ATF indices closed flat to slightly positive on Tuesday, as China posted surprise Purchasing Managers Index (PMI) figures, beating forecasts. However, weak external demand coupled with uncertainty over the domestic and global Covid-19 situation could be prompting investors to bet that Beijing will take more decisive action on interest rates.

China has sealed off 400,000 residents in Hebei Province’s Anxin County in a sign that a recent resurgence of cases is proving difficult to stamp out, according to Bloomberg yesterday.

The China Bond 50 index, the flagship index, and the ATF ALLINDEX Local Governments gained 0.03%, while the ATF ALLINDEX Enterprise and Financial rose 0.01%. The ATF ALLINDEX Corporates closed flat. 

The ATF ALLINDEX Local Governments index, seen here, also gained 0.03% on Tuesday.

Meanwhile, the yield on China’s 10-year bond has remained steady over the last few days, closing at 2.90%.  

The country’s June manufacturing Purchasing Managers Index came in at 50.9, up from 50.6 in May, while the non-manufacturing PMI rose to 54.4, versus 53.6 in the previous month.

However, the surge came largely as a result of a pick-up in domestic activities, as external demand remains weak, according to Iris Pang in a research note from ING. She noted that China remains sensitive to the global Covid-19 situation, and export orders will continue to contract as the rate of infection rises across the world.

The uncertainty related to the virus, and the possibility of a second wave of infection either locally or globally has caused the government not to set a GDP growth target following the historic slump of -6.8% in the first quarter of 2020, she said.

The ATF ALLINDEX Enterprise index, seen here, rose 0.01%.

The ATF ALLINDEX Financials index, seen here, rose 0.01%.

The People’s Bank of China has until now adopted a targeted approach for liquidity injection, such as a cut in the 14-day repo rate by 20bp to 2.35% earlier this month, and requesting for financial institutions to forego 1.5 trillion yuan ($212 billion) of profit in 2020 on behalf of corporate borrowers. Pang anticipates a targeted Reserve Requirement Ratio of 0.5%. A more broad-based easing such as cut in interest rates is unlikely without a resurgence of Covid-19 that needs to be rapidly brought under control, she said. 

The ATF ALLINDEX Corporates index closed flat.