Yesterday the leading gauge on the US manufacturing sector surprised to the downside dipping below 50 for the first time since early 2016. The decline in August was dramatic as the ISM Manufacturing PMI Index fell from 51.2 to 49.1 highlighting continued weakness. ISM New Orders fell to levels not seen since the Great Financial Crisis but in fairness it came off historical highs in December 2017. The situation facing the US manufacturing sector is elevated inventory which needs to be brought down before production can go up again. The initial reaction was a weaker USD and sell-off in US equities.
Adding to negative macro backdrop US President Trump warned that if he is re-elected his demands for a US-China trade deal would be tougher than current demands. China’s largest technology company Huawei gearing up for US court case said yesterday that the US had been launching cyber-attacks against the company’s systems. Once again, more escalation and lower probability for a trade deal this year.
Just as markets were shaping up for declines two major events hit during the Asia session. China’s Services PMI for August declined a bit but remained moderately strong suggesting that the global services economy is still not seeing contagious spill over effects from the manufacturing weakness. Equities were already on the move when the next event hit. The Hong Kong leader Carrie Lam announced that she would formally withdraw the extradition bill.
Hang Seng futures jumps 4% on extradition bill withdrawal
The mood was good with Hang Seng futures up 1.2% when the news hit that the extradition bill would be formally withdrawn. The news sparked massive bids pushing up Hang Seng futures by another 2.5%. This is a significant event as this could be interpreted as China blinking or at least postponing confrontation with Hong Kong. With the upcoming 70th Anniversary of the Chinese Communist Party (CCP) on October 1 the move makes sense. If the demonstrations decline meaningfully in size over the next couple of days and weeks, then we expect this to be a significant catalyst for Hong Kong equities. Short-term this is likely the biggest opportunity in global equity markets.