2016 Off To A Miserable Start: Asian Stocks Drop; Futures Slide After China PMI Tumbles On Dire Commentary

Earlier in the session, after the surge in oil prices on fears of a spike in belligerence between Saudi Arabia and Iran, bulls were hopeful that after a poor close to 2015, at least the first trading day of 2016 would set a positive mood: after all, if there is one thing war is good for, it is to lift stock markets. And it did... for about 3 hours.

Then moments ago, Caixin Media and Markit Economics released China’s December manufacturing purchasing managers’ index.  It was a doozy, falling to 48.2 from 48.6 in November, well below the 48.9 consensus estimate and even lower than the 49.6 printed a year ago, its tenth consecutive month in contraction territory and the lowest reading since September 2015.

The trend is clearly not one's friend, especially if one is part of Beijing's political oligarchy.

As the report noted, there was a renewed contraction of output, with total new work continuing to fall, while new export work declines for first time in three months; finally, companies continued to shed staff as the greatest threat facing China, a massive labor revolt, continues to slowly simmer.

The details were quite frankly, stunning, in their negativity: as if Markit wanted to paint China's economy in the worst way possible:

Adjusted for seasonal factors, the Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – registered below the neutral 50.0 value at 48.2 in December, down from 48.6 in the previous month. Business conditions have now worsened in each of the past 10 months. That said, the latest deterioration was modest overall.

 

A renewed contraction of manufacturing output weighed on the headline index reading in December. Although the rate of reduction was modest overall, it was the seventh time in the past eight months that production has fallen, and contrasted with a stabilisation in November. Anecdotal evidence suggested that relatively weak market conditions and reduced client demand had prompted firms to cut output in the latest survey period.

 

Indeed, total new business declined again in December, and at a similarly modest rate to those seen in the prior two months. Data suggested that softer domestic and international demand led to lower overall new work, with new export business also falling in December. Furthermore, this was the first time that new work from overseas had fallen since September.

 

Lower output requirements underpinned a further fall in purchasing activity in December. Moreover, the rate of contraction quickened slightly since November and was marked overall. As a result, stocks of inputs also declined over the month, while fewer sales led to a slight accumulation of stocks of finished goods.

 

Manufacturing companies continued to cut their payroll numbers at the end of 2015 and at a moderate rate. According to panellists, lower staff numbers were the result of company down-sizing policies and cost-saving initiatives. Fewer employees contributed to an accumulation of outstanding work in December, with the rate of growth quickening to an eight-month high.

 

December data signalled a further fall in average cost burdens faced by Chinese manufacturers. Moreover, the rate of reduction eased only slightly since November and remained sharp overall. Panellists that reported decreased input costs widely attributed this to lower raw material prices. Manufacturers generally passed on their cost savings to clients in the form of lower selling prices, while some companies mentioned that greater market competition had led them to cut their tariffs.

The summary from He Fan, Caixin's Chief Economist was downright dire:

“The Caixin China General Manufacturing PMI for December is 48.2, down 0.4 points from the reading for November. This shows that  the forces driving an economic recovery have encountered obstacles and the economy is facing a greater risk of weakening. More fluctuations in global markets are expected now that the U.S. Federal Reserve has started raising interest rates. The government needs to pay more attention to external risk factors in the short term and fine-tune macroeconomic policies accordingly so the economy does not fall off a cliff. It needs to simultaneously push forward the supply-side reform to release its potential and reap the benefits.”

Here, again, is the key part: "The government needs to fine-tune macroeconomic policies accordingly so the economy does not fall off a cliff."

But... 7% GDP.

Incidentally, all this is happening as China's set the Yuan's fixing at 6.5032, another multi-year low for the currency as China's devaluation is accelerating with every passing day.

 

Furthermore, offshore Yuan is collapsing... breaking above 6.6100...

As a result, algos quickly got the hint that nothing has changed from the deteriorating trends of late 2015, and promptly applied that pattern to the E-mini, which after optimistically rising as high as 2043, has since dropped 11 points and was trading at the lows of the session, well in the red...

 

... and following its favorite carry trade partner, the USDJPY, which has likewise dumped, below the key 120.00 support, and is currently trading at a 2-month low.

Which reminds us of what Goldman said just on December 20: "we continue to expect $/JPY higher. We recommend being long $/JPY as part of our 2016 top trade recommendation (along with short EUR/$) and forecast $/JPY at 130 in 12 months."

It really never fails.

And speaking of things that are falling, it wasn't just US equity futures and the USDJPY. It was everything, with Asia largely down by 1% or more as of this writing:

  • MSCI AP Index -1.2% to 130.46; telecoms services, IT fall most
  • MXAPJ Index -1.4%; S&P 500 Futures +0.2%
  • Nikkei 225 -1.1%; Topix -0.8%; yen +0.3% to 120.3/USD
  • Hang Seng Index -1.5%, HSCI -1.4%, HSCEI -1.6%; H.K.’s HSI falls most in 3 weeks.
  • ASX 200 -0.1%
  • Kospi -1.2%
  • Straits Times Index -1%
  • KLCI -0.7%
  • TWSE -2%
  • Philippines Composite -0.4%

Finally, remember when "bad news was good news"? Well, as of this moment the Shanghai Composite is down -4% and sliding fast... and the broader CSI-300 is limit down 5%...