Oil drops as Chinese Manufacturing Activity Shrink for a Second Straight Month in a row!
US stocks trading mix in the first hours after Wednesday's open, while in the recent days, US leading indices have been losing ground. The main reasons for pausing the downtrend could be weaker than expected economic data in the US and the Oil price fall after the disappointing Chinese data. Lower economic activity and oil prices can both decrease inflation. Therefore, market participants lowered their expectations for a 75-bps rate hike.
In the North American season, the US ADP National Employment report showed private payrolls increased by only 132,000 jobs in August, almost twice less than consensus expectations of 288,000 jobs. After yesterday's surprising JOLTs numbers that show opening jobs are much more than earlier months and expectations and today's missing ADP numbers, now we have to wait until Friday and watch the nonfarm payrolls estimated to rise by 300,000 in August, after recording a 528,000 increase in July.
While in the US, any weaker than expected economic data means less pressure on FED to act more aggressively, it can help the stock markets to increase. On the other hand, we also had disappointing economic data from China, which can decrease the Oil demand. These two mentioned factors are considered opposite factors for oil prices.
Before US data, Chinese economic data caused concern for many investors earlier today. Data show that manufacturing activities in the biggest factory in the world contracted for a second straight month in August. Power crashes and COVID-19 lockdowns were the main reasons for this slowdown.
According to the published data, the Chinese official manufacturing purchasing manager's index (PMI) was 49.4 for August. While it was more than 49.2 of estimates and improved slightly from July, a reading below 50 indicates a contraction in the sector.
The weakness seen in the manufacturing activities now started to appear in other sectors, as August's non-manufacturing PMI reading at 52.6 was lower than July's reading of 53.8.
Now and with these data, we can say that the recovery seen earlier in the year in the Chinese economy has largely died down, increasing the likelihood of a global recession.
While economic data from China and the United States both signaling of lower economic activities, it can cause another wave of supportive government policies in China and a less hawkish tone of FED in the US; according to the EIA report, US crude oil inventories dropped by more than expected last week.
The US Energy Information Administration reported that in the week ended August 26, Crude oil inventories dropped by 3.326 million barrels against expectations for a draw of 1.483 million barrels. Moreover, Gasoline inventories dropped by 1.172 million barrels against expectations for a draw of 1.178 million barrels. This report also shows that Distillate stocks rose by 0.111 million barrels, while the expectation had been for a draw of 0.96 million barrels.
These weaker than expected economic data, even if in the short term, means less energy, especially oil demand. However, with their effect on monetary policies and economic decisions, there will not be too much room to fall.
From the technical point of view, WTI's downtrend ended at $85, and now it is in a recovery mood. However, the asset cannot confirm the bullish trend as long as it is not trading stable above $94.50. 20 DMA at $90.50 is also the pivot point and psychological level.
