The preliminary "Flash" PMI reading from HSBC and Markit has dipped below the 50 line which marks the division between expansion and contraction.  The reading for January came in at 49.6, significantly below the December reading of 50.5 and the expected value of 50.6. The new numbers extended a weakening of the manufacturing sector seen in the fourth quarter 2013.  The contraction for January was the first in six months.  Among the effects resulting has been global stock market declines Thursday and Friday.

Some of the losses for major stock markets this week (from ETFs):

• Germany (EWG):  -2.8%
• Canada (EWC):  -2.8%
• U.S. Dow Jones Industrials (DIA): -3.1%
• Japan (EWJ):  -3.5%
• London (EWU):  -3.7%
• Australia (EWA):  -4.6%
• Hong Kong (EWH):  -5.3%
• Shanghai (FXI):  -6.7%

The entire emerging market sector was hit hard.  EEM,  the emerging market ETF, sold off  more than 5% Thursday and Friday.

From Reuters, Dariusz Kowalczyk, a senior economist and strategist for Credit Agricole CIB in Hong Kong said:

"Such a reading highlights the deteriorating growth outlook as policymakers are tightening their monetary stance, pushing through with an austerity campaign, and withdrawing stimulus measures."

Kowalczyk also mentioned the possibility of seasonal effects:

"There are no strong seasonal factors in January - sentiment has increased in every January over the past 5 years. There is, theoretically, a possibility of a Lunar New Year effect, but even in 2012, when the holiday also fell in January, the HSBC PMI rose. Hence, we assume that the weakening of mood is cyclical and reflects underlying weakening of growth momentum."

The drop in manufacturing was ascribed to weakening domestic demand according to Qu Hongbin, chief economist for China at HSBC.  However the report showed a faster decline in the rate of decrease in new export orders.

Whether this is the start of a major stock correction or not will await what happens over next several weeks. To retain your sanity during this time period, some recent history might help.  For those who have forgotten, China PMI readings have dipped below 50 for more than half of the months over the past three years and the world did not come to an end.

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Sources:

• Operating conditions deteriorate for the first time in six months (HSBC Purchasing Managers’ Index™ Press Release, Markit, 23 January 2014)

• Asian Stocks Drop After China’s Flash Manufacturing PMI (Jonathan Burgos, Bloomberg, 23 January 2014)

• China factory contraction shows weak start for economy in 2014 (Jonathan Standing and Kevin Yao, Reuters, 22 January 2014)