This includes the final
August eurozone manufacturing index
released yesterday morning. It came in at 51.4 compared with the flash estimate of 51.3 and July's reading of 50.3. This is the best print since June, 2011 and it was broadly based (with forward looking orders up 2,5 points and at the highest reading since May, 2011 and with orders/inventories widening). To be sure, the European economies are emerging from a lengthy recession, but at least growth has stabilized.
In China, the August Manufacturing Index
to 51.0 compared with expectations of 50.6 and with July's 50.3. This is the best print in nearly 18 months. Again, like the eurozone, the most forward-looking component, orders, was stronger than generally forecast ,with export orders finally above 50 (indicating expansion expected). Orders and an increase in export orders to a level above 50 (indicating expansion for the first time since March, 2013) are consistent with 7-7.5% real GDP growth for China.
Like many, I am skeptical of the Chinese data. But the non-government data reflected in August's HSBC/Market Manufacturing Index has risen to more than 50 from only 48 in July. This, coupled with an increase in commodity prices over the last two months, confirms China's stabilization of growth. Importantly, these data suggest that China's focus to rein in the excesses in the shadow banking system are not denting economic activity. This dulls the potential (big) risk that emerging markets economic weakness results in a further liquidation of EM positions (stocks and bonds) through the shorting of more liquid assets like the U.S. market.
Most Headwinds Will Likely Cap This Rally Short of July Highs
I should emphasize that I don't see anticipated relief in the September-October market climb to carry it above the year's recent highs.
The most significant challenge to the market's highs includes continued weak domestic and global economic data (led by a stall in the U.S. housing market), this year's previous expansion in valuations, a challenging profit landscape and an imminent confrontation regarding the debt-ceiling issues.
Though it remains my view that the 2013 market top is likely in, over the near term I expect global equities to rally and for gold, oil and fixed income instruments to be under pressure.