Impact on Industrial Activity and Commodity Markets
With China’s manufacturing PMI for May beating forecasts at 51.8, we see this as a clear signal of strengthening industrial activity. This unexpected resilience suggests underlying demand is healthier than the market priced in. Our immediate focus will shift toward assets directly tied to Chinese industrial consumption. We believe this will drive a short-term rally in industrial commodities. For instance, copper futures for July delivery have already ticked up 1.5% in early trading this morning, June 1st, reacting to this news. We are positioning for this by buying call options on copper and iron ore futures that expire in the next 4 to 6 weeks.Implications for Currencies and Equities Linked to China
This data also strengthens our bullish view on commodity-linked currencies, especially the Australian dollar. Given that Australia’s exports to China represented nearly 38% of its total export earnings in the last fiscal year, the AUD is extremely sensitive to this type of data beat. We will be looking to buy AUD/USD call options to capitalize on expected currency appreciation. The positive economic surprise should also provide a tailwind for Chinese equities. Historically, after the last two times the official PMI beat consensus by more than 0.3 points, the Hang Seng China Enterprises Index saw an average gain of 3.8% over the following ten trading days. Consequently, we are evaluating purchasing call spreads on major China-focused ETFs to gain upside exposure while defining our risk.Start trading now — click here to create your real VT Markets account.
