Markets Apr 03

Oil-fueled rally loses steam

Downbeat data from Japan and China reins in stock market gains 

Oil-fueled rally loses steam
The Jibun purchasing managers' survey in Japan, and the Caixin Composite in China both showed how the coronavirus hit two of the world's biggest economies in March. File photo: AFP

(ATF) Asian markets are tracking advances in oil prices after US President Donald Trump tweeted that Russia and Saudi Arabia had agreed to cut production. But downbeat data from the world’s second- and third-largest economies reined in gains. Both Jibun Bank's Japan Services Purchasing Managers’ Index (PMI) and China’s Caixin Composite reflected the hit to the economies from the coronavirus pandemic.

Brent Futures surged 21% and US WTI crude soared 24% and all eyes are now on an emergency meeting of the OPEC called by Saudi Arabia.

The Jibun survey for March, showed service providers in Japan recorded a substantial drop in business activity that was just shy of the survey record seen in February 2009. The Jibun Bank Japan Services PMI is compiled by IHS Markit from survey responses from a panel of around 400 service sector companies. The PMI index dropped substantially in March to 36.2, from 47.0 in February, signalling a severe decline in private sector business activity from the previous month.

China’s Caixin Composite Output Index came in at 46.7 in March, the second-lowest reading in 11 years. The March reading marked the second lowest level since the survey began in 2005. A number above 50 indicates an expansion in activity, while a figure below that points to a contraction.

The Nikkei 225 is up 0.88%, Korea’s Kospi benchmark is 0.62% higher but Hong Kong’s Hang Seng index is 0.58% lower and the S&P ASX 200 is down 0.43%. That meant the MSCI Asia Pacific ex-Japan index was also flat, while the MSCI Asia Pacific index rose 0.82%.

Overnight, the Dow Jones Industrial Average added 2.2%, the S&P 500 advanced 2.3% and the Nasdaq Composite climbed 1.7%.

Meanwhile, Morgan Stanley has increased its overweight on China equities. It expects the valuation premium versus other Emerging Markets (EM) to move to a record from the current 6.3% on forward Price/Earnings and although China materially outperformed Emerging Markets since end-January, they were increasing the overweight further to 250bp. The investment bank said this was driven by relative sector skew towards domestic demand stocks in new economy sectors, support from Southbound/domestic flows into Hong Kong dual-listed, and coordinated policy support and whole-nation approach to Covid19, which appears to be bringing a first-in, first-out result.

In the day ahead, services PMI from the EU and several European markets will be tracked as will be the PMI data and the non-farm payrolls out of the US. This is of particular interest after Thursday’s weekly unemployment claims jumped by 3.341 million to a seasonally adjusted 6.648 million. A Reuters survey of economists, said the US data release on Friday is likely to show non-farm payrolls dropped by 100,000 jobs last month.