Flash consumer confidence index for EU and Euro Area improves, Spain out of recession, but the markets stay negative. Flash PMIs to be published Thursday morning
There was good news regarding the Eurozone and the EA on Wednesday, an official consumer confidence index published by the European Commission showed an improvement. Now despite it coming in at -14.5 that’s actually close to the longer term average of -14 for the Euro Area. Moreover the reading in the E.U. is actually ahead of the longer term average of -14, at 11.5 it’s significantly ahead of the long term average.
“In October 2013, the DG ECFIN flash estimate of the consumer confidence indicator improved slightly in the euro area (-14.5 after -14.9 in September 2013) and remained unchanged in the EU (at -11.7).”
Spain also moved out of recession according to data published on Wednesday, the improvement was marginal, only 0.1%. Spain exited a two-year recession in the third quarter thanks to its strong exports, but with domestic demand still depressed, sustainable growth creating jobs may remain absent for some years. Gross domestic product growing by 0.1 percent in the third quarter from the second marked the economy’s first expansion in nine quarters. Spain’s economy has shrunk or has been stagnant every year since 2008. The property market collapse left millions out of work, forced a deep financial sector overhaul and drove thousands of companies in bankruptcy.
Europe’s banking sector falls as markets fear the coming stress tests
News broke on Wednesday midday that European banks will be subjected to various tests to test their capital adequacy, moreover Mario Draghi, the president of the ECB, made it very clear that there would be no room for failure, banks who failed to reach the necessary standards would be shut down. The market wasted no time in reaching its conclusions with regards to who are currently the weakest, with Commerzbank shares down 4% in Germany, Spain’s Bankinter shedding 4.5% and several Italian banks dropping by 5%.
Bank of Canada cuts its prediction for US growth this year to 1.5% from 1.7%
The central bank now expects US GDP to rise by just 2.5% in 2014, from 3.1%. The global economic backdrop has become less “favourable” for Canada, it said. Bank of Canada also dampened the expectation of raising interest rates, saying conditions are too weak. After 18 months of suggesting a rise could be needed, BoC dropped any reference to a “gradual normalization” of interest rates.
Market overview
Despite the positive news from Europe, regarding consumer sentiment and Spain exiting recession, the weight of news from China regarding potential failed banks and the fact that the ECB will examine the health of many European banks caused the main European indices to close down on the day.
The DJIA closed down 0.35%, the recent rally, due to a temporary solution regarding the debt ceiling issue being agreed, may have now faded. The SPX closed down 0.47% and the NASDAQ down 0.57%. In Europe the STOXX index closed down 0.94%, reacting badly to the coming bank tests, the FTSE closed down 0.32%, CAC down 0.81%, DAX down 0.31%. The IBEX reacted badly to the bank test news despite crawling out of a deep recession, down 1.84% on the day. The MIB closed down 2.38%, with the Athens exchange hurting the most, down 3.82% on the day.
Commodities once again endured a sell off, improved crude oil reserve numbers for the USA, up to 5.2 million barrels, caused WTI oil to fall by 1.22% to end at $97.10 per barrel on the day. The critical psyche level of $100 per barrel now being breached substantially with new medium term support levels being established. NYMEX natural rose by 1.06% to $3.62 per therm. COMEX gold was down 0.72% at $1333.00, with silver on COMEX down 1.01%.
Equity index futures are pointing to a negative open in Europe followed by New York opening down. The DJIA equity index future is currently down 0.38%, NASDAQ down 0.42%, STOXX down 0.96%, FTSE down 0.40%, DAX down 0.35%
Forex focus
The yen gained 0.8 percent to 134.12 per euro late in New York, after climbing as much as 1.2 percent, the biggest intraday advance since Aug. 27th. It depreciated to 135.51 Wednesday, the weakest level since November 2009. Japan’s currency strengthened 0.8 percent to 97.34 per dollar and touched 97.16, breaching its 200-day moving average at 97.28. The yen strengthened the most in eight weeks versus the euro as borrowing costs for Chinese banks jumped by the most since July affecting demand for safer assets.
The greenback was little changed at $1.3779 per euro after depreciating earlier to $1.3793, the weakest level since November 2011, and gaining to $1.3742.
The loonie, as the Canadian dollar is known, lost 1 percent to C$1.0390 per U.S. dollar. New Zealand’s dollar, nicknamed the kiwi, slumped as much as 1.8 percent, the biggest intraday decline since Aug. 5th, to 83.57 U.S. cents before trading at 83.80 cents, down 1.6 percent. Australia’s dollar declined as much as 1 percent, the most on an intraday basis since Sept. 12th, to 96.07 U.S. cents before trading at 96.14 cents.
Bonds
The benchmark U.S. 10-year yield slipped one basis point, or 0.01 percentage point, to 2.5 percent as of 5 p.m. New York time. It reached 2.47 percent, the lowest level since July 22. The 2.5 percent note due in August 2023 rose 3/32, or 94 cents per $1,000 face amount, to 99 31/32. The yield fell nine basis points yesterday, the most since Sept. 18th. Treasuries rose for a second day, with 10-year yields dropping to the lowest level in three months, amid speculation the Federal Reserve will push back plans to trim its bond-purchase programme.
High impact news events and fundamental policy decisions that may affect sentiment on October 24th
Flash manufacturing PMIs take centre stage in terms of high impact news events on Thursday, the main economies are expected to improve according to Markit economics. France is expected to rise to 50.3 for manufacturing and 51.2 for services PMI. Germany is expected to print at 51.6 for manufacturing and 53.8 for services. Should the figures disappoint then the euro may come under pressure. Overall Eurozone PMIs are expected in at 51.4 for manufacturing and 52.3 for services.
The USA prints its balance of payments in the afternoon expected to print at -40 billion for the month. Flash manufacturing PMI is expected in at 52.8. New home sales in the USA are predicted in at 427K. Natural gas storage figures may affect the price of gas in the USA, whilst BoE governor Mark Carney holds court with a press conference.
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