Comment: European Markets Weigh Up Strong Euro Zone PMIs Against Poor China PMIs
January 23, 2014 8:15 am
Weakness for European equity markets this Thursday morning as an unexpected contraction in the Chinese manufacturing activity and a warning from the ECB President Mario Draghi against undue optimism surrounding the euro zone economic recovery weighs on investors’ sentiment. Draghi’s attempts to downplay optimism surrounding the euro area pressured European stock futures ahead of the market open however many are of the view that Draghi is managing market expectations. That being said, stock indices have pared opening losses to inch a tad higher after data from the euro zone paints a brighter outlook for manufacturing and services activity. The EMU flash composite PMIs just released hit the highest level since 2011, indicating an encouraging acceleration in recovery. The PMI jumped by more than 1 point to 53.4 in January, smashing expectations, driven by the growing confidence in business confidence in both manufacturing and services sectors this month. Germany was unsurprisingly the standout performer and encouragingly, the French reading showed some progress. So in all, a welcome result but market participants shouldn’t get ahead of themselves just yet – the data suggests that its really only Germany driving the recovery whilst other nations are still patchy and uneven. France still could be a drag on the recovery and the euro zone periphery remains fickle at best. IMF this week expects GDP for the euro zone in 2014 to come in at 1% which looks rather ambitious given the underlying problems relating to a lack of structural reforms in certain nations and more worryingly, the high levels of unemployment in the euro zone. This data does not change the ECB’s view on the euro zone economy so it would be unwise to rule out further easing measures in the near-term. Staying on the euro zone, another upbeat story is that of the heartening recovery in the Spanish labour market with data today revealing that the number of unemployment people in Spain dropped in Q1 last year, the first time in a decade. Data out of Spain in recent days bolsters confidence over the country’s growth prospects, inducing market participants to invest in Spanish debt and equities – recent debt auctions have been successful and the IBEX index is up 4% year-to-date, outperforming its European peers. That being said, Spain still has the highest jobless rate in Europe after Greece at a staggering 26% – there’s a long way to go before the market can truly be confident about the Spanish labour market. Going back to what set of the sour tone across global markets, China’s HSBC manufacturing PMI index rattled the market by falling into contraction zone in January, down to 49.6 from 50.5 in December versus expectations of 50.3. A reading below 50 shows contraction whilst a reading above 50 would signal expansion. Now, this week we had GDP data from China which showed the economy cooling with industrial output and retail sales registering losses too. The IMF also downgraded China’s GDP forecasts for 2014 to 7.5% from 7.7%. For that reason, a deterioration in PMIs was expected but markets were caught by surprised by the drop into contraction zone – some are now fearing that 10-year economic revamp to gear the country to one based on domestic consumption rather than one reliant on debt and infrastructure spending, may take longer to bear fruit. That all being said, China’s central bank showed their commitment this week by injecting cash into money markets. Traders are still of the view that China’s policy makers will not let growth fall below 7.5% this year, but that we must get used to contending with a cooling Chinese economy in the months ahead. The big worry is for the Asian region and EMs in general who are tied closely to China and its growth prospects – EM currencies today are under the cosh on the poor China data together with the US Fed’s tapering measures which was initiated last month by the central bank. Markets are now expecting another round of tapering this month with the Fed looking to possibly set a precedent of incremental removals of liquidity from the market to limit shock factors and volatility and allowing the market to get used to the unwinding effect. South Africa’s rand hit a six-year low while the Turkish lira registered a new record low against the USD of 2.2814. South Korea’s won and Russia’s rouble were both also under pressure. Slowing Chinese growth and Fed stimulus removal are both seen as the drivers of capital outflows from EMs this year with cash being re-allocated back to the developed world due to the strengthening recovery in countries such as the US, UK and Germany. Looking ahead, investors await data from the Confederation of British Industry’s Distributive Trades Survey that might show a reading of 25.0 for January, compared to a reading of 34.0 recorded in the previous month. Out of the US, weekly jobless claims, existing home sales and leading indicators will take the spotlight. Before that, we US earnings from McDonald’s and Lockheed Martin.
Weakness for European equity markets this Thursday morning as an unexpected contraction in the Chinese manufacturing activity and a warning from the ECB President Mario Draghi against undue optimism surrounding the euro zone economic recovery weighs on investors’ sentiment. Draghi’s attempts to downplay optimism surrounding the euro area pressured European stock futures ahead of the market open however many are of the view that Draghi is managing market expectations.
That being said, stock indices have pared opening losses to inch a tad higher after data from the euro zone paints a brighter outlook for manufacturing and services activity. The EMU flash composite PMIs just released hit the highest level since 2011, indicating an encouraging acceleration in recovery. The PMI jumped by more than 1 point to 53.4 in January, smashing expectations, driven by the growing confidence in business confidence in both manufacturing and services sectors this month. Germany was unsurprisingly the standout performer and encouragingly, the French reading showed some progress.
So in all, a welcome result but market participants shouldn’t get ahead of themselves just yet – the data suggests that its really only Germany driving the recovery whilst other nations are still patchy and uneven. France still could be a drag on the recovery and the euro zone periphery remains fickle at best. IMF this week expects GDP for the euro zone in 2014 to come in at 1% which looks rather ambitious given the underlying problems relating to a lack of structural reforms in certain nations and more worryingly, the high levels of unemployment in the euro zone. This data does not change the ECB’s view on the euro zone economy so it would be unwise to rule out further easing measures in the near-term.
Staying on the euro zone, another upbeat story is that of the heartening recovery in the Spanish labour market with data today revealing that the number of unemployment people in Spain dropped in Q1 last year, the first time in a decade. Data out of Spain in recent days bolsters confidence over the country’s growth prospects, inducing market participants to invest in Spanish debt and equities – recent debt auctions have been successful and the IBEX index is up 4% year-to-date, outperforming its European peers. That being said, Spain still has the highest jobless rate in Europe after Greece at a staggering 26% – there’s a long way to go before the market can truly be confident about the Spanish labour market.
Going back to what set of the sour tone across global markets, China’s HSBC manufacturing PMI index rattled the market by falling into contraction zone in January, down to 49.6 from 50.5 in December versus expectations of 50.3. A reading below 50 shows contraction whilst a reading above 50 would signal expansion. Now, this week we had GDP data from China which showed the economy cooling with industrial output and retail sales registering losses too. The IMF also downgraded China’s GDP forecasts for 2014 to 7.5% from 7.7%.
For that reason, a deterioration in PMIs was expected but markets were caught by surprised by the drop into contraction zone – some are now fearing that 10-year economic revamp to gear the country to one based on domestic consumption rather than one reliant on debt and infrastructure spending, may take longer to bear fruit. That all being said, China’s central bank showed their commitment this week by injecting cash into money markets. Traders are still of the view that China’s policy makers will not let growth fall below 7.5% this year, but that we must get used to contending with a cooling Chinese economy in the months ahead.
The big worry is for the Asian region and EMs in general who are tied closely to China and its growth prospects – EM currencies today are under the cosh on the poor China data together with the US Fed’s tapering measures which was initiated last month by the central bank. Markets are now expecting another round of tapering this month with the Fed looking to possibly set a precedent of incremental removals of liquidity from the market to limit shock factors and volatility and allowing the market to get used to the unwinding effect. South Africa’s rand hit a six-year low while the Turkish lira registered a new record low against the USD of 2.2814. South Korea’s won and Russia’s rouble were both also under pressure.
Slowing Chinese growth and Fed stimulus removal are both seen as the drivers of capital outflows from EMs this year with cash being re-allocated back to the developed world due to the strengthening recovery in countries such as the US, UK and Germany. Looking ahead, investors await data from the Confederation of British Industry’s Distributive Trades Survey that might show a reading of 25.0 for January, compared to a reading of 34.0 recorded in the previous month. Out of the US, weekly jobless claims, existing home sales and leading indicators will take the spotlight. Before that, we US earnings from McDonald’s and Lockheed Martin.
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