CHNComp under pressure after weak PMIs

11:29 AM 31 May 2023

Hang Seng futures (CHNComp) traded lower today following the release of weakish Chinese PMIs for May. Manufacturing PMI dropped from 49.2 to 48.8 while market expectations pointed to an increase to 49.4. Meanwhile, services PMI dropped from 56.4 to 54.5 while the market expected a drop to just 55.1. This was the third drop in manufacturing PMI in a row, the second consecutive month of the index staying below the 50 threshold, signaling a contraction, as well as the lowest reading since December 2022. In the case of services PMI, this was the second drop in a row and the lowest reading since January 2023.

While worse-than-expected PMI readings have contributed to the weaker performance of the Chinese equities today, it should be said that indices in whole Asia-Pacific region traded lower. This overall deterioration in market sentiment is reasoned with a number of Republicans refusing to support a debt ceiling agreement reached by US House Speaker McCarthy. Nevertheless, the deal will likely land in US Congress today and Republican negotiator McHenry said that they have enough votes to pass it today.

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Initial improvement in mood in the Chinese manufacturing sector has been neutralized, as was consistently shown by the weakness of the stock market. If the yuan continues to weaken against the dollar, it is possible that the CHNComp may drop below 6000 points. Therefore, it is crucial to sign the debt ceiling suspension bill, as it will most likely cause the dollar to depreciate across the broader market. Source: Bloomberg

CHNComp strongly correlates with USDCNH, so the behavior of the dollar will be crucial for this index. CHNComp has broken out of a triangle pattern and is currently testing a significant support level, marked the 61.8% Fibonacci retracement of the entire upward impulse. On the other hand, if the US removes the debt limit and liquidity in the US financial sector begins to decrease, it cannot be ruled out that the divergence between CHNComp and US500 will narrow. Source: xStation5

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