Between The Lines

Sep 3 • Between the lines • 1858 Views • Comments Off on Between The Lines

Danske Bank ‘Calls Off’ European Debt Crisis Due To Positive PMIs Whilst Elsewhere Caution Is Urged…dreams

The extremely healthy manufacturing PMIs, published by Markit Economics on the morning of Monday September 2nd, provided a massive boost to European indices once the news eventually reached investors. Other than France every European country measured by Markit registered a significant improvement.

Nowhere was this improvement better illustrated than by the UK’s manufacturing PMI. The seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) hit a two-and-a-half year high of 57.2 in August, up from a revised reading of 54.8 in July (previously reported as 54.6).

Now on the face of it this was an incredible figure, suggesting that the UK’s “march of the makers”, as the UK chancellor referred to the UK manufacturers during one of his first budget announcements, after he’d put together the finishing touches to his various incentives and stimulus packages, had finally arrived. But has it, does the figure and the optimism really stand up to close inspection…?

The answer could be no, which is why those calling off the European debt crisis are extremely premature in their proclamations. And one simple figure, relating to the UK manufacturing recovery,  illustrates just why Markit could be overestimating the strength of the recovery based on the clients they survey. The UK manufacturing performance is still 11% short of the figure registered in 2007. Now this figure is difficult to uncover from Markit’s perpetually bullish data, but it exists on the UK ONS database and suggests two issues. Firstly, Markit are widely out of touch with the real sentiment in the UK’s manufacturing base and secondly their methodology might need calling into question.

However, it’s not just Markit that appear to be over-optimistic with regards to the supposed manufacturing recovery in the UK and Europe, Danske Bank made a statement that dwarfed the optimism caused by Markit by claiming that the European debt crisis could be over, based on the strength of the PMIs…


Frank Øland Hansen, one of Danske Banks Europe analysts, stated in a note;

There are increasing signs that Europe currently is leaving the crisis behind much faster than most had expected. Todays PMI data signal growth in both Italy and Spain. Its now only Greece that appears to be stuck in recession for some time.”

Its our assessment that the debt crisis is over. With that, we think there will be no more market panic, where uncertainty about one country spills over into others and creates fears for the entire survival of the euro zone.”

There will still be bumps along the road, but weve seen the euro area able to handle large obstacles, so we dont expect smaller bumps will trigger renewed panic on the financial markets in the future.

The improvement in Italy and Spain is largely export-driven. In recent years, the southern European countries have had to streamline operations, cut wages and  implement necessary structural reforms. Now we are starting to see the payoff, in the form of more-competitive economies.”

The recovery is fragile and largely reflects that the rest of the world currently is improving. If the global recovery derails, it will look bad for Spain and Italy.”

“Reforms are still necessary, and there is in both countries a long way to go before the government-debt situation is under full control.

Are we witnessing the green shoots of a potential sustained recovery? Possibly, but it’s far too early to call and investors and analysts should be mindful that we’ve been here before, in 2011 when a raft of positive news suggested that the recovery in Europe was gathering pace. That recovery was dashed as many countries’ economies went into reverse depending the crisis, for example, Greece entered the critical phase of its debt crisis.

Whilst it would be churlish not to embrace the ripples of positivity the Markit manufacturing data has caused, investors and traders would be advised to keep their hands in their pockets regarding any bets that the crisis is finally over. That claim by Danske Bank not only looks premature, but badly advised and could come back to haunt Danske in the future.

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