Comment: Spain; the euro zone’s star-performer but falling prices pressures ECB to act
April 3, 2014 7:01 am
European stock indices inching up from opening levels as the risk-tone remains well-supported but market participants adopt a wait-and-see approach ahead of the ECB; FTSE100 up 15 points while EuroStoxx50 up around 5 points – FX markets stable; EUR/USD still flirting around the 1.38 level. Gold prices decline while safe-haven core government bonds edge lower, suggesting that market participants are still favouring riskier assets.
Despite the IMF warning the world faces “years of slow and subpar growth”, stock markets over in the US rallied Wednesday with the S&P500 reaching another record high thanks to a robust ADP jobs report which suggests that 191k jobs were generated by the US economy in March, showing the labour market there is warming up again after a harsh winter. ADP data seen as a precursor to the nonfarm payrolls number so Wednesday’s figure certainly bodes well for Friday’s release but market participants at the moment would rather refrain from building too much risk ahead of the ECB.
Overnight, Asian markets were inspired by the rally on Wall Street which led to firmer price action across the region – markets were further enthused by China’s mini-stimulus package to build new railways and give tax breaks for small enterprises. Although the package is small in size, market participants are certainly seeing this as Beijing’s commitment to offer stimulus when needed, allaying fears that the country’s economic growth won’t fall off a cliff as policymakers there will provide backstops.
Onto the immediate picture here in Europe, UK PMI services data just out and shows a bit of easing but nothing to worry us too much as the indicator still firmly points to strong growth and the reading is balancing after strong surge in activity. Euro zone PMI services data were also a touch lower versus the initial estimate but still pointing to stabilisation in the region’s services sector with heart-warming figures from Spain, the star performer. Euro zone PMI came in at 52.2 from 52.4 on the month but in growth zone for the ninth consecutive month [readings over 50 confirm expansion and below 50 is contraction] suggesting a path to recovery has been found although progress is still somewhat slow-gear.
Within the euro zone PMIs, the picture was mixed with Germany easing a tad, similar to the softening in the country’s manufacturing PMIs but France’s figure were up a touch, which is actually very encouraging when taken together with the manufacturing report as it confirms the French economy is progressing in the right direction. Italy’s PMI fell below 50, which is worrying but traders are welcoming the Spanish reading which shows a modest rise to 54 from 53.7 on the month, marking the fifth consecutive month of expansion – clearly the implementation of recent reforms and austerity have worked their way into the real economy in Spain, with domestic demand and improving conditions in the labour market fuelling the growth there.
Even more encouraging given Spain’s economy is heavily reliant on its services sector despite the fact that price of goods are falling there and companies have to downsize their staffing level. That said, the report is encouraging; the worst of the crisis in Spain is over and the country is on the path to growth – moreover, it’s a fine example of a ‘peripheral’ country implementing structural reforms, initiatives and austerity to stimulate growth better than Italy, Greece and Portugal. Furthermore, Spain just sold a total of EUR5.58b of bonds in an auction which we well-bid with ample demand, confirming the upbeat picture surrounding investor appetite for Spanish debt – it’s hard not to be inspired by Spain’s progress.
The PMIs out of the euro zone are being closely watched by Mario Draghi and Co., at the ECB who are all set to meeting in the coming hours to decide on policies. Most market participants [including me] do not expect the ECB to act at this month’s meeting, holding fire as the central bank would opt to employ dovish language/communication as a policy tool to quell concerns as opposed to tinkering the balance sheet just yet.
The problem for the ECB is that with deflation risks running high in the euro zone [evident in today’s PMI services too] the central bank is being pressured to act with either rate cuts and negative deposit rates, however, by pulling the stimulus-trigger, the ECB is acknowledging deflation being a threat which will fuel deflationary concerns amongst financial markets. That, would then led market participants to view rate cuts/negative deposit rates inadequate to battle inflation and want more from the ECB, a possible big bazooka, which at the moment is unnecessary, particularly when the euro zone economy is showing signs of life after 5 years.
European stock indices inching up from opening levels as the risk-tone remains well-supported but market participants adopt a wait-and-see approach ahead of the ECB; FTSE100 up 15 points while EuroStoxx50 up around 5 points – FX markets stable; EUR/USD still flirting around the 1.38 level. Gold prices decline while safe-haven core government bonds edge lower, suggesting that market participants are still favouring riskier assets.
Despite the IMF warning the world faces “years of slow and subpar growth”, stock markets over in the US rallied Wednesday with the S&P500 reaching another record high thanks to a robust ADP jobs report which suggests that 191k jobs were generated by the US economy in March, showing the labour market there is warming up again after a harsh winter. ADP data seen as a precursor to the nonfarm payrolls number so Wednesday’s figure certainly bodes well for Friday’s release but market participants at the moment would rather refrain from building too much risk ahead of the ECB.
Overnight, Asian markets were inspired by the rally on Wall Street which led to firmer price action across the region – markets were further enthused by China’s mini-stimulus package to build new railways and give tax breaks for small enterprises. Although the package is small in size, market participants are certainly seeing this as Beijing’s commitment to offer stimulus when needed, allaying fears that the country’s economic growth won’t fall off a cliff as policymakers there will provide backstops.
Onto the immediate picture here in Europe, UK PMI services data just out and shows a bit of easing but nothing to worry us too much as the indicator still firmly points to strong growth and the reading is balancing after strong surge in activity. Euro zone PMI services data were also a touch lower versus the initial estimate but still pointing to stabilisation in the region’s services sector with heart-warming figures from Spain, the star performer. Euro zone PMI came in at 52.2 from 52.4 on the month but in growth zone for the ninth consecutive month [readings over 50 confirm expansion and below 50 is contraction] suggesting a path to recovery has been found although progress is still somewhat slow-gear.
Within the euro zone PMIs, the picture was mixed with Germany easing a tad, similar to the softening in the country’s manufacturing PMIs but France’s figure were up a touch, which is actually very encouraging when taken together with the manufacturing report as it confirms the French economy is progressing in the right direction. Italy’s PMI fell below 50, which is worrying but traders are welcoming the Spanish reading which shows a modest rise to 54 from 53.7 on the month, marking the fifth consecutive month of expansion – clearly the implementation of recent reforms and austerity have worked their way into the real economy in Spain, with domestic demand and improving conditions in the labour market fuelling the growth there.
Even more encouraging given Spain’s economy is heavily reliant on its services sector despite the fact that price of goods are falling there and companies have to downsize their staffing level. That said, the report is encouraging; the worst of the crisis in Spain is over and the country is on the path to growth – moreover, it’s a fine example of a ‘peripheral’ country implementing structural reforms, initiatives and austerity to stimulate growth better than Italy, Greece and Portugal. Furthermore, Spain just sold a total of EUR5.58b of bonds in an auction which we well-bid with ample demand, confirming the upbeat picture surrounding investor appetite for Spanish debt – it’s hard not to be inspired by Spain’s progress.
The PMIs out of the euro zone are being closely watched by Mario Draghi and Co., at the ECB who are all set to meeting in the coming hours to decide on policies. Most market participants [including me] do not expect the ECB to act at this month’s meeting, holding fire as the central bank would opt to employ dovish language/communication as a policy tool to quell concerns as opposed to tinkering the balance sheet just yet.
The problem for the ECB is that with deflation risks running high in the euro zone [evident in today’s PMI services too] the central bank is being pressured to act with either rate cuts and negative deposit rates, however, by pulling the stimulus-trigger, the ECB is acknowledging deflation being a threat which will fuel deflationary concerns amongst financial markets. That, would then led market participants to view rate cuts/negative deposit rates inadequate to battle inflation and want more from the ECB, a possible big bazooka, which at the moment is unnecessary, particularly when the euro zone economy is showing signs of life after 5 years.
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