Oil Gains Further; China Manufacturing PMI Falls To 3-Year Low

 | Sep 01, 2015 04:45AM ET

•Oil gains further The remarkable rebound in oil continued yesterday, with WTI trading this morning an astonishing 7.6% higher than yesterday’s early European price, and even that was down substantially from its peak during the US day (note though that our table below shows the change from the end of one European day to the next and so has a different figure). According to Bloomberg, this has been the biggest three-day rally in oil in 25 years. The reason for the rise yesterday seems to have been the expressed willingness of OPEC producers to hold talks with non-OPEC producers to get fair prices, although with the caveat that it has to be on a level playing field. The US Energy Information Administration (EIA) also revised down its estimate of recent domestic oil production, while there were unsubstantiated reports of a decline in Saudi output.

• Personally I can’t see Russia, Mexico or any other non-OPEC producer agreeing to limit production, so I think this is all talk and no action. I suspect that positioning had a lot to do with the surge: with prices below $40, investors who were short, and there were a lot of them, rushed for the door at the same time to lock in profits and sent it soaring. That surge isn’t likely to last indefinitely.

• Oil prices could come off further following the news of a further contraction in Chinese manufacturing (see below) and ahead of Wednesday’s weekly EIA report, which is expected to show a rise in US oil inventories. Until there is concrete news of production cutbacks, the glut is likely to continue and prices are likely to fall further, in my view. That prospect bodes ill for CAD, NOK, RUB and MXN. CAD was especially strong overnight and so it may show a particularly notable reaction to the reversal in oil prices during today’s trading.

• China manufacturing PMI falls to three-year low China’s official manufacturing PMI fell into contractionary territory in August, hitting a three-year low. Although the final Caixin/Markit manufacturing PMI was revised up slightly, it remains deeply in contractionary territory and so failed to offset the impact of the official figure. Virtually all Asian stock markets fell (Malaysia being the sole exception). S&P 500 stock futures were down a sharp 1.8% at the time of writing. Further risk reduction today could prove positive for EUR and JPY, two major funding currencies.

• RBA keeps rates unchanged, as expected The RBA kept its benchmark rate unchanged at 2% at its meeting Tuesday, as the market has predicted. Moreover, Gov. Stevens’ comments following the meeting were almost unchanged from last month. He maintained his neutral bias and as for AUD, he simply repeated last month’s statement that the Australian dollar is adjusting to the significant declines in key commodity prices. The fact that they are not more concerned than they were last month, despite the increased weakness in the Chinese economy and the turmoil in global stock markets, is slightly bullish AUD and the currency rallied somewhat, although whether it continues to do so today may depend more on the performance of stock markets – so far very weak – than carry-over momentum from the RBA.

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• Today’s highlights: During the European day, we get the final manufacturing PMI figures for August for several European countries and the Eurozone as a whole. As usual, the final forecasts are the same as the initial estimates. Market reaction on these news is usually limited unless there is a huge revision from the preliminary figures. The UK manufacturing PMI for August is forecast to increase a bit, which could prove GBP-positive. Eurozone’s unemployment rate for July is also due to be released.

• From Canada, the monthly GDP for June and the Q2 GDP figure are due out. The monthly figure is expected to accelerate, but not enough for Q2 GDP as a whole to improve, as it is expected to fall further and put the country in a technical recession. It looks like the effects of falling commodities prices on the Canadian economy are not going to fade out anytime soon. The renewed slump in oil prices is likely to put further downside pressure on CAD, and BoC could act again to underpin the fragile economy. A weak quarterly growth rate could push CAD lower. The RBC manufacturing PMI for August is also coming out. Market pays more attention to the Ivey PMI to be released on Friday. Thus, the reaction is usually limited at the release.

• In the US, the final Markit manufacturing PMI and the ISM manufacturing PMI both for June are also due out. The ISM index is expected to decline slightly, but not enough to change anyone’s view on the economy. The ISM prices paid index, however, is expected to drop further to a low 39.0, which may call into question whether inflation is likely to pick up any time soon and therefore whether the Fed can hike rates in September. That could be negative for the dollar.

• Speakers include Boston Fed President Eric Rosengren, a non-voting member of the FOMC.

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h3 EUR/USD headed towards 1.1310/h3