Chinese concerns reemerge, as market sentiment sours ahead of predicted US factory orders slump

• Chinese concerns reemerge as services growth declines
• AUD sharply lower as RBA keep rates steady
• European PMI continues weakening theme
• Inflation concerns grow as crude hits highest level since November 2022
• US factory orders expected to slump into worst reading since Covid collapse

Recent gains in China have been unwound overnight, with the latest Caixin services PMI tumbling into an eight-month low overnight. Coming off the back of Monday’s relief rally on fresh real estate support, and a debt extension for homebuilder Country Garden, we have seen the Hang Seng revert back to the pessimism tone that has dominated recent weeks. Country Garden did make two multi-million dollar interest payments overnight, staving off default for now. However, with the China developer staring at a debt pile reportedly around $196 billion, any short-term reprieve on their debt payment timeline does little to help eradicate the ongoing risk of default.

The Australian dollar has been hit hard overnight, with the outgoing RBA Governor Phillip Lowe opting to keep rates steady for the third consecutive meeting. Coming at a time when Chinese fears are rearing their head once again, the prospect that the RBA has likely ended its tightening phase has sent AUDUSD tumbling into two-week lows. However, the increasingly concerning economic data emerging from the US and European regions do highlight a strong chance that soon enough we will see a similarly hesitant approach from other central banks.

European markets have continued the negative theme established in the Asian session, with fears over a growing Chinese crisis growing to the detriment of market sentiment. A raft of PMI surveys released throughout Europe this morning continued the concerning theme of economic deterioration, with both Spain and Italy seeing their services sector fall into contraction. Meanwhile, the downward revisions to German, French, and eurozone composite PMI surveys highlight a worsening in economic conditions over the course of August alone.

Inflationary fears are regaining traction as energy prices start to push steadily higher. While WTI crude has started to fade this morning, it comes off the back of a Friday spike that pushed the key gauge into the highest level since November 2022. This recent rise in crude has already had a tangible impact on consumer prices, with UK drivers hit by one of the biggest monthly fuel price hikes in over 20-years last month.

Looking ahead, US factory orders data will be followed closely, with markets forecasting a potential July collapse that could see the biggest contraction since the Covid related slump in mid-2020. Coming off the back of a US jobs report that saw a jump in unemployment and a 30k downside revision to the prior payrolls release, a sharp contraction in factory orders today could similarly raise concerns that the US economy is rolling over.