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Market on Risk-Off Tone as Data Show Slowing Manufacturing Activities Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Mon May 23 16 23:30 ET

Market sentiment began with week with a softer tone, as manufacturing PMI in both the US and Eurozone surprised to the downside. Wall Street ended the day lower with DJIA and S&P 500 indices slipping -0.05% and -0.21% respectively. Europe's Stoxx 600 index dropped -0.39%. US dollar dropped with the DXY index losing -0.1%. The weakness was mainly against Asian currencies such as Japanese yen and Korean won. The greenback remained firm against commodity currencies, gaining 0.08% to 0.5%. Commodities fell across the board with the -6.68% selloff of iron ore price gaining the most attention. Rising inventory and concerns over demand from China are the main causes of recent price decline.

Japanese yen rose to the highest level in 2 days against US on Monday as, over the weekend, US warned Japan against currency intervention. In a statement issue by the US Treasury Department ahead of the G7 meeting in Japan, Secretary Jack Lew "underscored that the commitments made by the G-20 in Shanghai to use all policy tools to promote growth - fiscal policy, monetary policy and structural reforms - and to refrain from competitive devaluation and communicate closely have helped to contribute to confidence in the global economy in recent months". Following the G7 meeting, the US released another statement, reinforcing the importance of adhering to the agreement of "refraining from competitive devaluation". As suggested in the statement, "those commitments made in Shanghai, along with our agreement to use all policy levers to boost global growth, have helped to contribute to more confidence in the global economy". It is expected that "the meetings we have had here in Sendai among the G7 will have that same effect".

Staying in Japan, trade surplus widened to 0.43 trillion yen in April from an upwardly revised 0.3 trillion yen a month ago. The market had anticipated a drop to 0.27 trillion yen. The flash reading of manufacturing PMI slipped to 47.6 in May from 48.2 a month ago. This came in weaker than consensus of 48.3. According to Markit, the agency compiling the PMI data, "manufacturing conditions deteriorated at a faster rate mid-way through the second quarter of 2016, suggesting the aftermath of the earthquakes were still weighing heavily on goods producers". It added that the sharp decline in new orders was driven by "the fall in total new orders was a marked contraction in foreign demand, which saw the sharpest fall in over three years". Meanwhile, "goods producers were also less optimistic towards their hiring policies with the rate of job creation easing from April's three-month record".

In the US, the flash manufacturing PMI fell to 50.5 in May from 50.8 a month ago. The moderation was mainly driven by renewed decline in production, softer new order growth and further cuts to stocks of inputs. The fatigue seen in the manufacturing sector cast doubt over whether the US economy could rebound in the second quarter from a relatively soft first quarter. As market suggested, "the survey is signaling that manufacturing will act as a drag on economic growth in the second quarter, leaving the economy once again dependent on the service sector, and consumers in particular, to sustain growth… Output is falling for the first time since the height of the global financial crisis, with factories hit by slowing growth of order books and falling exports".

Today, we would receive more detail on Germany's GDP growth in 1Q16 which was unexpectedly firm. Germany's ZEW economic sentiment probably added +0.8 point to 12 in May, while the current situation index added +0.7 point to 48.4 this month. ZEW economic sentiment for the Eurozone might have gained +1.9 points to 23.4 in May. In the US, new home sales probably added +9 to 520K in April. Philadelphia Fed president Patick Harker (dove, voter in 2017) would deliver his speech about economic outlook.