Markets Jul 03

China data supports market sentiment

US market boosted by 4.8 million returning to work in June, but record surge in virus cases in many states put a cap on joy prior to long holiday weekend

China data supports market sentiment
Patrons enjoy some outdoor dining in Los Angeles, California on July 2, 2020 a day after new regulations came into effect banning all indoor dining as coronavirus cases hit record highs. Hospitalizations in California jumped by 56% over a 2-week period. But there was positive news on national employment – 4.8 million people returned to work in June, which was much more than expected. Photo: Frederic J. Brown / AFP.

(ATF) China led Asian markets higher after upbeat data from the services sector gave legs to the rally triggered by blowout US jobs data.

China’s services sector activities grew at the fastest pace in more than a decade in June with the Caixin/Markit services Purchasing Managers’ Index (PMI) rising to 58.4, the highest reading since April 2010, from May’s 55.0.

But analysts said it must be compared with the record contraction suffered in February at the peak impact of Chinese lockdown measures, which meant this was only a partial recovery of lost output.

“The recovery ahead is expected to be contingent on there being no serious second wave of infections or further shocks, or escalation of global trade weakness,” Bernard Aw, Principal Economist at IHS Markit, said. “The increase in the level of backlogs of work in June was also subdued, underscoring how demand needs to strengthen further in the coming months to prevent the recovery from losing momentum.”

Mainland China’s CSI300 index was up 0.77%, Hong Kong’s Hang Seng benchmark rose 0.55% and Japan’s Nikkei index rose 0.34%.

Gains ahead of US holiday, as virus spreads

Gains were capped ahead of the long holiday weekend in the US where the resurgence of Covid-19 remains a threat to the economic recovery. A Reuters study showed more than three dozen American states are seeing a rise in coronavirus cases after the United States set a new record with more than 51,000 infections in a single day on Thursday.

That took the edge off the rally stoked by the mammoth US payroll numbers as June’s further 4.8 million jobs, added to the 2.5 million unexpectedly added in May. Markets had expected an addition of 3 million jobs. The Dow Jones Industrial Average edged up 0.36%, the S&P 500 gained 0.45%, and the Nasdaq Composite advanced 0.52%.

The Nasdaq struck a record closing high and the S&P 500 and the Dow are 7.6% and 12.6% short of their all-time peaks struck in February.

As the second half of the year begins, investors are hoping the combination of monetary and fiscal stimulus launched by central banks and governments will help the global economy de-freeze.

“As was the case with the virus cycle, the recovery will be sequential and involve different regions at different times – on a ‘first in, first out’ basis – and will depend on the size of the policy response,” Pascal Blanqué and Vincent Mortier, of Amundi Asset Management, said.

“Risk assets have recovered too much and too quickly in our view: discounting an immediate return to normality at a time when many painful adjustments in the real economy and the corporate sector need to be made. In the second part of the year, a reality check on earnings growth has to be considered.”

Credit markets are firm but the mood is cautious ahead of the long weekend as investors digest newly sold bonds and prospective issuers monitor sentiment.

The Asia IG index has moved in by 2 basis points to 80/81 bps and sovereign CDS have narrowed by 1-2 basis points.Wuhan Dangdai has issued price guidance for reopening its bonds due 2023.