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Encouraging News From China Likely To Effect Market's Momentum

Zacks Equity Research

More positive news out of China and another weak reading out of Europe provide the backdrop for today’s trading action. Stocks are indicated to essentially tread water in today’s session, but a couple of housing and factory sector readings about the domestic economy could give them a modest directional nudge.  

The HSBC Bank’s preliminary or flash manufacturing sector PMI for June came in at a seven month high of 50.8 vs. 49.4 in May – the first time that the reading has come above the ‘50’ level. This follows improvement on this front last year when both the HSBC and official government measures showed gains. The gain in the HSBC reading is particularly notable as this survey is weighted towards small and medium sized businesses that are mostly in the private sector versus the mostly state-owned large enterprises that get tracked in the official survey. The improvement is likely a reflection of the government’s mini-stimulus measure unveiled a few months back to prop up the country’s growth profile. China’s government authorities have set a +7.5% GDP growth target, while growth in Q1 came short of that target.

The success of the government’s mini-stimulus measure as reflected in today’s data would limit the odds of anything more on the horizon. But the existing package didn’t have much for the property sector, which has been a notably weak spot for the economy. New home prices were down in the country on a month-to-month basis for the first time in over two years, with prices even in big cities like Shanghai and Shenzhen losing ground. Retrenchment in the property sector likely still has plenty of room to go and represents the biggest risk to the country’s financial system and economic outlook. While this week’s data is no doubt welcome, but it doesn’t answer all the questions.  

The stabilizing Chinese outlook is in contrast to developments in the Euro-Zone region where the picture is far from satisfactory. We saw on Monday loss of ground in the region’s PMIs, with the situation particularly dire in France whose downslide appears to be gaining pace. Data vendor Markit’s composite June flash PMI for the Euro-zone came in weaker than expected at 51.9, with France’s manufacturing PMI coming in at 47.8. Perhaps the recent ECB moves will be enough to turn things around for France, but the country is faced with structural rigidities that will need to be tackled by the country’s leadership at some stage. While many of the peripheral nations like Spain, Italy, Portugal, Ireland and Greece have gone through years of restructuring reforms, France hasn’t done anything to open up its economy.

In corporate news, unconfirmed press reports indicate Oracle (ORCL) is planning to announce acquisition of Micros Systems (MCRS) for $5 billion, the company’s largest purchase since its Sun Microsystems acquisition for more than $7 billion. Micros which develops internet-connected cash registers will give Oracle a foothold in the retail and hospitality spaces. Oracle reported weak results the other day, but has plenty of cash on hand to pay for this deal. Incidentally, the Technology sector has largely been absent from the recent surge in M&A activities which have mostly been in the pharma, telecom and med sectors.

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