July 31, 2013 / 1:11 AM / 4 years ago

Tense for China test, after Fed settles nothing

SYDNEY (Reuters) - Asian markets got off to an indecisive start on Thursday after the Federal Reserve provided little clarity on the outlook for U.S. stimulus, leaving investors hostage to Chinese data later in the session.

The official measure of Chinese manufacturing activity, due at 0100 GMT, is forecast to dip to 49.9 in July from 50.1 in June. Markets, however, fear risks are to the downside given the run of disappointing data recently.

Analysts at Australia and New Zealand Bank look for a fall to 49.7. "Manufacturers' order books are still quite thin," they wrote in a note. "In addition, liquidity conditions turned tight again towards the end of July, which may constrain commercial banks' capacities to extend credit to the economy."

A downside surprise would pressure stocks and currencies across the region while also unsettling commodity prices.

Especially vulnerable is the Australian dollar, as China is the country's single biggest export market. The currency was already under heavy fire having skidded to a three-year trough at $0.8910 early Thursday.

Dealers reported particularly heavy stop-loss selling against the yen which saw the Aussie at its lowest for the year so far around 87.40 yen.

The currency has been undermined by widespread expectations the Reserve Bank of Australia (RBA) will cut interest rates to a record low of 2.5 percent next week. <AU/INT>

Other major currencies were mostly steady, with the dollar pinned at 97.83 yen, and the euro holding at $1.3294 after fading from a $1.3344 high overnight.

Policy meetings at the European Central Bank and the Bank of England could see both reaffirm their forward guidance that rates will stay low for an extended period, perhaps to the benefit of the U.S. dollar.

Wall Street stocks had ended Wednesday near flat after the Fed said it will continue to buy $85 billion in assets per month and made no mention of when it might start to taper its purchases. <TOP/CEN>

A pedestrian holding an umbrella walks past a stock quotation board displaying various stock prices outside a brokerage in Tokyo July 29, 2013.Yuya Shino

Investors took the Fed's statement as slightly dovish, which helped most commodities make small gains while Treasury yields reversed an early rise.

Gold steadied at $1,325 an ounce after a whippy session on Wednesday saw it fall as low as $1,305.30 at one point. Oil markets put in another firm performance with U.S. crude at $105.14 a barrel, after rising around 2 percent on Wednesday.


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Stocks and commodities had been supported by data that showed the U.S. economy grew an annualized 1.7 percent in the second quarter, beating forecasts of a 1.0 percent rise.

However, growth in the previous four quarters was revised down and the overall impression was of a sub-par performance.

That point was acknowledged by the Fed in the handful of changes made to its policy statement. It characterized growth as "modest" rather than moderate and recognized the risk that inflation could go too low.

"As a new addition to the statement, it does count as a very minor, marginally dovish change to the official line," said Martin McMahon, an economist at Commonwealth Bank of Australia.

Yet while Treasury yields dipped slightly on the statement, the market still suspects the Fed to will start slowing the pace of stimulus sooner rather than later.

"We continue to expect tapering of the open‑ended asset purchases to commence in the autumn, probably already following the September 18th FOMC meeting. If not, then certainly before year‑end," added McMahon.

Much might depend on what the U.S. payrolls report shows on Friday. Forecasts favor a solid increase of 184,000 with perhaps a chance of an upside surprise after the ADP survey showed private jobs rose 200,000 in July.

Editing by John Mair

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