ASIA MARKETS: Asian Shares Drop As China PMI Triggers Doubts About Economy

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PBOC guides yuan by strongest amount against dollar in 10 years

The latest signs that China will struggle to turn its economy around in the fourth quarter took steam out of Asian markets’ October rally, which was the region’s best month in six years.

Japan’s Nikkei Stock Average   was down 1.9% and Australia’s S&P/ASX 200  lost 1.3%.

Hong Kong’s Hang Seng Index  fell 0.6% while the Shanghai Composite Index   was down 0.2%.

South Korea’s Kospi gained 0.1%.

China’s central bank guided the onshore yuan by the strongest amount against the U.S. dollar in more than 10 years on Monday. It fixed the currency at 6.3154 to one U.S. dollar , up 0.5% compared with Friday’s fix, representing the strongest percentage change since July 2005.

The onshore yuan, which is allowed to trade 2% above or below the fixing, last traded at 6.3278, compared with 6.3175 late Friday.

On Monday, a private gauge of China’s manufacturing activity, the Caixin China manufacturing purchasing managers index (http://www.marketwatch.com/story/slight-upswing-for-caixin-china-manufacturing-pmi-2015-11-02), rose to 48.3 in October, marking the eighth-straight month of contraction. The reading, which tends to capture more private enterprises than the official reading, was at 47.2 in September.

A reading above 50 indicates expansion in activity, while one below that level signals contraction.

On Sunday, an official gauge of Chinese factory activity contracted unexpectedly in October. China’s manufacturing purchasing managers index remained unchanged at 49.8 in October from a month ago, the third-straight month the reading came in below 50.

“There’s some fairly big pessimism that the economy will continue slowing in the further quarter,” said Evan Lucas, a market analyst at brokerage IG.

Lucas added that the stronger yuan fixing was likely in reaction to Sunday’s data, but also a signal of Chinese authorities’ intentions to moderate the currency’s decline since the surprise devaluation in August.

The onshore yuan had posted its biggest one-day gain since March 2014 on Friday amid apparent intervention by the central bank. Traders said authorities could be boosting the currency ahead of the International Monetary Fund’s meeting later this month, when it will determine the composition of its elite basket of reserve currencies. China has been vying for the yuan’s inclusion as the country seeks to raise its status on the global stage.

The readings are yet another signal of China’s stalling economy that has unsettled markets: Growth slowed to 6.9% in the third quarter, fueling worries that Beijing may miss its target of about 7% growth for the year.

Worries about slowing global growth fueled investors’ bets on further stimulus from central banks around the world, helping shares in the region close out October with their best monthly performance since May 2009. Most recently, China has cut interest rates and the European Central Bank has signaled it might introduce further easing in December. The Bank of Japan didn’t expand its asset purchase program last Friday, although economists say weak economic data in Japan could pressure the bank to introduce further easing next year.

The MSCI Asia Pacific Index gained 7.9% in local currency terms in October. Meanwhile, U.S. stocks rose 8.5% last month, their biggest monthly percentage gain in four years.

But investors say they are worried that the strong bounce back in Asia will cool, as the region still faces headwinds from lower commodity prices and a higher U.S. dollar, which makes it more expensive to pay off dollar-denominated debts. Matthew Sherwood, head of investment strategy at Perpetual Investment Ltd, said he expects markets to be in a “state of flux” in the near term.

“The recovery globally is starting to show some signs of fatigue,” said Sherwood. “Markets are oscillating between up and down [days] more frequently.”

On Friday, the Dow Jones Industrial Average and S&P 500 both lost 0.5%, weighed down by financial companies.

Firms in Asia, excluding Japan, so far reported third-quarter profits 6.5% lower on year compared with forecasts. That would be the 12th of the last 14 the region has missed estimates, according to Mr. Sherwood. Nearly half of firms in the region have reported earnings the latest quarter already.

Shares are still relatively expensive even after the summer selloff, with MSCI Asia ex-Japan now trading at 11.7 times forward-looking earnings, compared with 10.7 at the end of September. The index has been rebounding since late August.

Fatigue is showing in China markets in particular, where the Shanghai Composite Index fell 0.9% last week, even after the People’s Bank of China cut interest rates in October for the sixth time since November last year.

Brent crude oil was flat at $49.57 a barrel.

Gold prices were down 0.1% at $1,140.60 a troy ounce.

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