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China Growth Worries Center-Stage Again

Tuesday, May 3, 2016

Global growth worries are back at center stage following weak data out of China and Europe, putting the major indexes on track for weak open. The sell-off makes sense, but the opposite reaction will be reasonable as well when looked at from the Fed angle.  

China worries have been a preoccupation with the market for a while, but the headwind appeared to have faded somewhat from the spotlight following signs that the Chinese government’s stimulus measures were having an impact. Today’s private sector measure of activity levels in the factory sector follows a similar loss of momentum from the official PMI measure last week, which showed that the government’s stimulus measures may not be enough to generate an enduring rebound.

The Caixin purchasing managers index, produced by the Caixin Media Company and research firm Markit Economics, came in weaker than expected for April at 49.4 vs. 49.7 the month before, the 14th month in a row of a sub-50 reading. The official PMI measure that came out on Sunday also lost ground though it stayed above the 50 level. Market participants see the Caixin survey as better representative of the country’s small- and medium-sized manufacturers, with the April survey’s new orders, exports and employment components showing the weakness continuing into the coming months.

The market’s China obsession makes perfect sense given the country’s centrality to the global growth outlook. All major U.S. companies, from Apple (AAPL) to General Motors (GM) and everything in between, are increasingly reliant on that market for growth. In fact, one could argue that the ongoing Apple stock price troubles are primarily China related. Similarly, global commodities like oil, copper and others would like to see a stabilized China economy to find a sustainable bottom. Even today’s Euro-zone growth warning is partly a function of what is happening in China.

As significant as China is to the markets, one could argue that renewed China worries should be a net positive for stocks. Such twisted logic would make sense only when seen from the perspective of what it would mean to the Fed. The Fed only just dropped the reference to international risks in its official statement, but these China-centric headwinds could very well bring that back and lower the odds of a June rate hike. With the Fed at the core of the market’s bounce from the February lows, any sign of continued Fed support should be helpful to the rally.

Sheraz Mian
Director of Research

Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.

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