Chinese industrial activity likely to climb further

Chinese PMI manufacturing for October showed clear signs of bottoming. Further improvement in the coming months is likely, which should give support to EM assets and risk assets in general. The lift to sentiment may be tempered by the fact that an improvement in China increases the odds of a rate hike from the Fed either in December or January.

"China is likely to be close to the end of the easing cycle. We look for one more cut in the reserve requirement ratio of 50bp but then expect the Chinese government to step to the sideline as evidence of a moderate recovery materialises", states Danske Bank.

The improvement in the industrial sector was in line with our expectations of a cyclical trough in these months driven by the policy stimulus (from both monetary as well as fiscal policy) and a recovery in the housing market. Chinese industrial activity is likely to climb further over the next one to two quarters as also signalled by a rise in credit growth, added Danske Bank. 

GDP growth is a bit detached from the industrial sector, though, and has shown much fewer swings as activity in the service sector has smoothed thedevelopment. Financial markets tend to focus more on the PMI data and the trough in PMI will ease the fear over a further hard landing and give support to risk assets - although it may be tempered by rising odds of a near-term Fed hike due to reduced global uncertainty.