China’s National Bureau of Statistics non-manufacturing Purchasing Managers’ Index printed at 50.1 in May, above the market forecast of 49.5. The reading stayed just over the 50-point threshold that separates expansion from contraction.
At face value, the data indicate marginal growth in services and construction activity relative to April’s pace, while outperforming expectations. The release may influence near-term assessments of domestic demand conditions as policymakers and markets track whether the recovery is broadening beyond manufacturing.
Chinese Services Sector Resilience and Equity Strategies
We see the unexpected expansion in China’s services sector as a sign of resilience in their domestic economy. This beat on the non-manufacturing PMI suggests internal demand is stronger than the market anticipated. This could provide a bullish catalyst for assets tied to Chinese growth in early June.
Given this, we are looking at call options on China-focused ETFs, such as the FXI or MCHI. With the CSI 300 index recently finding support near the 3,500 level, this positive data surprise could trigger a rebound. The improved sentiment may encourage capital to flow back into Chinese equities, which have underperformed global markets by nearly 8% year-to-date.
Implications for Commodities and Related Currencies
This data directly impacts our view on industrial commodities and commodity currencies. We are considering buying Australian dollar (AUD/USD) calls, as China remains the destination for over a third of Australia’s exports. Historically, a positive surprise of this magnitude in Chinese data has led to a short-term rally in the Aussie dollar.
We also believe this supports copper prices, which are a key barometer of economic activity. The construction component of the PMI data is particularly relevant, and we might add to long positions in copper futures. A sustained PMI reading above the 50 mark in China has often preceded strength in industrial metal prices over the subsequent month.
Finally, the uptick in activity points to firmer energy demand. We see this as a reason to sell out-of-the-money put options on WTI crude oil futures. This strategy allows us to collect premium while betting that stronger Chinese consumption will create a floor for oil prices, which have recently seen prices fall below $80 a barrel.
