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Stock Futures Trade Lower, Chinese Manufacturing PMI Contracts


2 August 2022 Written by Naeem Aslam  AvaTrade Chief Market Analyst Naeem Aslam

US and European futures are trading soft today as traders digest China’s economic numbers. The data has largely disappointed investors. The rebound in the Chinese data, which we saw more recently in Chinese numbers, began to stall. The evidence of this came in the Chinese Manufacturing PMI number today, which dropped into the contraction territory and printed a reading of 49 from its previous reading of 50.2. Investors are blaming the current slowdown in the activity due to the lockdowns in China.

If that is the reason, then there is less to worry about as such lockdowns are on the decline, and in the coming weeks, we should see improvement in the economic data. However, suppose the weakness in the economic numbers isn’t due to lockdowns but the cautionary tone adopted by corporations in their spending and paying due to mounting recession fear. In that case, we are looking at a picture that requires much attention.

We think that the slowdown is primarily due to the concerns of a potential recession taking place around the globe due to higher inflation and less spending, and it is highly likely that we may well see more evidence of this.

Another reason pulling the US futures down today is the hawkish tone adopted by the Fed members. Remember, the Fed increased the interest rate by 75 basis last week, and market players aren’t expecting the Fed to stay that hawkish. However, some comments over the weekend by Fed officials have alarmed investors.

Neil Kashkari emphasized that Fed is committed to bringing inflation down to 2%. If the Fed wants to get inflation close to its 2% target, the interest rate in the US will be going in the double-digit territory. It also means that the front loading process hasn’t ended, and investors should not think that the Fed will reduce the pace of hiking interest rates.

Forex 

The dollar index is the central focus once again, although the EUR/USD has been trading in positive territory during the early hours of trading. Euro traders know that the ECB is well behind the game in terms of increasing the interest rates, and the bank has no choice but to continue increasing the interest rates in the coming months. The EUR/USD is trading well off from its lows of the last month and its parity level, but we think that the path of the least resistance is still skewed to the downside as the EU is unlikely to avoid a recession. The economic headwinds are too strong for the EU, and they will drag the euro lower.

In the UK, the BOE is expected to step up its fight against inflation, and it is widely anticipated that BOE will increase the interest rate during its next meeting by 50 basis points. The meeting will take place on Thursday and will be the biggest event for Sterling traders. If the bank increases the rate by 50 basis points on Thursday, it will be the biggest hike in the bank’s history since 1995. The Sterling traders are on the watch for this event.

Geopolitical Tensions 

It seems like lawmakers aren’t bothered about ranching up the geopolitical tension even further. Nancy Pelosi is on her Asia tour, and rumours are that she will visit Taiwan. China has warned the US not to take such steps as the mainland will respond and have a military answer to such a situation. The Biden administration has increased more support for Taiwan recently, and the tension between China and the US is even higher on this issue during the Biden administration as compared to the Trump administration. Picking up another war while one hasn’t already finished isn’t a right step in the correct direction.

Stocks to Watch 

The corporate earnings will continue this week, and the stock to watch this week will be as follows. Alibaba, AMD, PayPal, Airbnb, Uber, Lyft, Robinhood, and Carvana will also be in focus. In the consumer and health sector, Starbucks, Eli Lilly, and CVS will also be in the spotlight.

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