Chinese Manufacturing Contracts

Overnight Wednesday, data out of China showed that manufacturing in the nation was slowing. China's purchasing manager index came in at 49, lower than the consensus estimate of 49.8. A reading below 50 signals a contraction in the manufacturing sector. Chinese authorities may have been anticipating a contraction, as they reversed policy overnight on Tuesday—lowering reserve requirements on banks. This comes in contrast to the policy prescriptions they had been following for months. Since 2010, Chinese authorities have been working to slow inflation in the growing economy. While China's rate of inflation has always been above those in developed economies, inflation began to spike tremendously in late 2010, particularly in food. Still, despite the miss in the PMI reading, Chinese stocks rallied on Thursday. The Shanghai Composite Index closed up over 2.25%, and at one point was up more than 3%. This positive move may have been in reaction to developments on Wednesday. The Federal Reserve and five other central banks moved together to lower US dollar swap rates—in effect, providing more liquidity for financials in Europe. This may have contributed to the nearly 500-point rally in the Dow Jones Industrial Average experienced on Wednesday. China's positive move on Thursday could simply have been a spillover from the gain in US equities.

Traders who believe that China's easing will revive its manufacturing sector in the near-term might want to consider the following trades:

Traders who believe that China will continue to weaken may consider alternate positions: