Markets trust Central Banks as much as they trust OPEC

Local market started with a drop and then spent the whole day recovering back to finish a slightly negative to start the new month. The initial selling was at large turnover as end of month window dressing unwound and then recovered on lower turnover as selling ran out. The bounce was mainly driven by the banks and global investors were buying it for the AUDUSD bounce. Size continues to matter as Micro Caps were the best while Small Caps were the worst. Energy and Banks were the best sectors while Staples and Retail were the worst.

Following the official manufacturing and services falling more than expected, the Caixin manufacturing moved into contraction territory. The Caixin China General Manufacturing PMI fell to 49.2 in August 2021 from 50.3 in July, missing market estimates of 50.2. This was the first contraction in factory activity since April 2020, dragged down by containment measures to curb rising cases of the Delta strain, supply bottlenecks, and high raw materials. Output shrank for the first time in 17 months; new orders dropped for the second month which was the steepest rate in 16 months, and exports sales contracted for the first time since February. Also, buying levels fell after rising in July. Meantime, employment was down fractionally after broadly unchanged a month earlier, with backlogs of work increasing at the fastest rate since May. Prices data showed input cost inflation picking up for the first time in three months, while factory gate prices rose only modestly, despite the rate of increase picking up. Lastly, sentiment remained strong, despite the degree of optimism unchanged from July's 15-month low.

We are in a data deluge on a global basis. We had the EU inflation shoot high overnight and we are in the PMI cycle. China lead the weaker PMI data and Asian PMIs have followed the trend and been weaker. We are going to get EU and US PMIs tonight ahead of the US job market updates later this week with NonFarm Payrolls being the main show.

Local GDP growth for Q2 beat expectations on government spending and kept it out of the technical recession worries. We all know Q3 will be negative. We are now seeing real pressure being put by governments and corporates to open up early Q4. If the vaccine rollout runs into problems and open up timing gets delayed, Q4 will be under threat. It is logical to assume there will be a ramp up in government spending around Q4 to avoid any recession risk as Q1 federal election is in play.

Just when you think investing can’t get any harder, then comes another meeting of OPEC+. They expected increase in supply may get help out of gulf shutdown in the short term. In saying that, OPEC+ has a few major players herding the cattle to move in any direction. China has been starting to have a decent influence in recent months. China slowdown may keep OPEC+ on the sidelines.

Comments on US market last close…

US market was slightly negative to finish the last day of the month. China PMI weakness, EU inflation beat and US property prices beating expectations were ringing alarm bells of stagflation and asset bubble risk. S&P -0.13%, DOW -0.11%, NASDAQ -0.04% and RUSSELL +0.34%. VIX climbed back up to mid 16. Yields moved up and USD slide lower. Oil and Copper slide lower while Gold moved up. Property and Retail lead the sectors while Energy and a Tech were the laggards. Markets will be looking at US PMIs tonight and NFP Friday night. China continues to move on regulatory reform to break high cost dominated sectors and curb commodity prices to bring down inflation and cost of living. They are letting the economy slow down to curb asset prices while the West continues to pump stimulus to do the opposite. Stagflation risks are rising and that will hit asset bubbles. Three weeks to US Fed update and weakening data may keep them on the sidelines again.

You can view the full Sunset Strip report, with charts and the end of day market stats, on the following link.

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