China’s manufacturing sector could fuel a bounce in the stock market this week.
CN50: Daily Chart
The CN50 index has found support at the 12,371 level for the third time and will target the 12,800 level first.
The Chinese manufacturing sector has the potential to boost the market after a bout of bearishness over the economy and monetary policy. Analysts have been hoping for more stimulus measures to boost the price of stocks, but despite some cuts in lending rates, the Chinese central bank has held back.
Gloom had set in in Chinese stocks after the reopening of the economy failed to hold onto initial traction. Last month’s manufacturing number from the NBS marked a third consecutive drop, with the index falling to 48.8. The 50-level is the difference between contraction and expansion. A jump back above the 50 level for June could lead to a rally in the Chinese stock market.
China’s manufacturing activity expanded at the fastest pace in a decade during February, but that was due to the index being affected by the inactivity a year earlier.
“The high PMI readings partly reflect the economy’s weak starting point coming into this year and are likely to drop back before long as the pace of the recovery slows,” Julian Evans-Pritchard, head of China economics at Capital Economics, said at the time.
The largest US investment banks have since lowered their forecasts for the Chinese economy, and money flows have slowed into Chinese stocks.
The tensions between the two countries over Taiwan were also a concern, but investment managers may come back if the economy shows signs of life. A decline in the yuan to 2022 lows could also spur the country’s export economy.
Traders have a line in the sand for the CH50 and should watch the NBS release for a potential bounce in the manufacturing index for further gains.
