Early Stock Market Weakness Indicates Volatility to Continue into New Year

Asian shares are trading lower on Wednesday in reaction to the worse than expected Chinese manufacturing data released earlier in the session. The selling pressure is even spreading to the European and U.S. stock index futures.

According to reports, a private survey of China’s manufacturing for the month of December showed factory activity contracted for the first time in 19 months. Traders said trade frictions between the United States and China, along with weak domestic demand were responsible for the decline.

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), a private survey, fell to 49.7 in December from 50.2 in November. Analysts were looking for the PMI to come in at 50.1 in December.

This bearish report on top of the official manufacturing PMI released on Monday reflects the damage inflicted by the ongoing trade war between the two economic powerhouses.

The official data showed a slowdown in activity for the month of December as the sector contracted for the first time in more than two years, dropping below the critical 50 level.

Both reports strongly suggest that the Chinese economy may come under greater pressure in early 2019. If it’s dragging down the global equity markets on the first day of trading in 2019, then it’s likely to continue for several months since there doesn’t seem to be an end in sight for the on-going trade dispute.

On December 1, U.S. President Trump and Chinese President Xi Jinping agreed to delay the planned U.S. increase of tariffs on $200 billion worth of Chinese goods that were initially due to take effect on January 1, while the two nations negotiated a trade deal. The deadline to reach the deal is March 1.

Last weekend, President Trump said that he had a “long and very good call” with Xi and that a possible trade deal between the two countries was progressing well. The recent PMI numbers suggest some urgency in getting the deal accomplished soon, or risk dragging the global economy into a recession.

Alex Capri, a visiting senior fellow at NUS Business School said, “I do believe, of course, the economy in China is decelerating. I do believe the numbers are worse than reported, of course, in that type of political environment where there’s strong censorship, where media is essentially prevented from reporting.”

Vishnu Varathan, head of economics and strategy at Mizuho Bank, said the slide in China’s PMI is “worrying”. He further added that this particular downturn in the sector “could be even sharper than headlines suggest.”

Today’s price action suggests 2019 will begin with a continuation of the weakness and the volatility that plagued the markets in late 2018, at least in the foreseeable future. Of course, conditions could change quickly if a U.S.-China trade deal is reached before the March 1 deadline.

At 0553 in the Asian cash market, the Nikkei 225 Index is trading 20014.77, down 62.85 or -0.31 percent. Hong Kong’s Hang Seng Index is at 25168.77, down 676.93 or -2.62 percent and China’s Shanghai Index is trading 2462.10, down 31.80 or -1.28 percent.