Markets are optimistic about China going into the latter half of the week. There is some key data scheduled, which is anticipated to be positive. But the center of attention is the expected meeting between US President Donald Trump and China’s President Xi Jinping on the sidelines of the APEC meeting. There are high hopes that the two leaders will sign a framework agreement to at least begin winding down the current trade war.
For commodity currencies, the end of the trade war might mean a return to buoyancy. Although exports from China have grown despite tariffs, lingering concerns persist about the world’s second-largest economy. It didn’t help that earlier this month, Q2 GDP fell short of the 5.0% target, growing at an annual rate of 4.8%. But clearing the trade hurdle might signal a more solid outlook for China’s demand, and commodity currencies could see support in the coming months.
What the Market is Looking for
Coming back to the data release, China will publish its official PMI figures for October on Friday. The consensus is for manufacturing PMI to slip slightly to 49.5 from 49.8 in September. That would keep it below 50 and marginally in contraction. Meanwhile, non-manufacturing PMI is expected to advance into expansion to 50.4 from 50.0 previously.
There could be a bit of a wrinkle in the data, however. The bulk of the survey was conducted during the period when the US and China were escalating trade tensions ahead of negotiations. That could have affected sentiment among purchasing managers, particularly at large, state-owned companies that the NBS tracks. Which means that a worse-than-anticipated read could be ignored by the markets, particularly if the news from the Trump-Xi meeting is reasonably positive.
Overshadowing the Data
There was considerable trepidation about the meeting of US and Chinese leaders, and it was only confirmed on Wednesday. Traditionally, the nuts and bolts of the deal are worked out in advance, so the Presidents conduct the signing ceremony. But what exactly has been agreed on still hasn’t been disclosed to the public, aside from particularly thorny political issues. Those include a pledge from China not to prevent the export of rare earths and to buy more soybeans.
Rather than the specific details, what matters to markets is the economic outlook. If the deal implies that the two countries will most likely de-escalate tensions and trade between them resumes a more stable course, then risk sentiment could be substantially supported. On the other hand, a “framework” deal could leave many unresolved issues open that have caused tension between the countries. Markets would then worry that more threats of tariffs and trade obstacles might happen in the near future.
Good News Is Now Good News?
With the Chinese central government in the midst of a significant economic support program, the market has had counterintuitive reactions to data. Poor data increases the likelihood of additional stimulus, leaving markets slightly more optimistic. And vice versa.
However, the significance of trade might override that dynamic, with positive news on a trade agreement followed by solid PMI numbers supporting commodity currencies. A sufficiently positive outcome in trade negotiations could even support the yen and Euro, as both economies are major exporters to China.
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