Mind The Gap; London Session Update Pre New York's Open
Dare we dream that Europe may be exiting recession?
In our Between The Lines article of this morning we emphasised the importance of paying close attention to the Markit Economics PMI data prints and how they could influence market sentiment, particularly if many of the individual publications relating to European manufacturing and service industry reversed trend, crossed the median 50 line and came in positive.
The European PMI data was indeed encouraging, providing a much needed market tonic after the 'flash' Chinese PMI data, courtesy of HSBC in conjunction with Markit, which showed an eleven month low. The flash HSBC/Markit Purchasing Managers' Index fell for the third consecutive month, to a reading of 47.7, from June's confirmed reading of 48.2. As with many diffusion indices a reading below 50 indicates that activity fell.
Hongbin Qu, chief China economist of HSBC:
"The lower reading of the July HSBC Flash China Manufacturing PMI suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking. This adds more pressure on the labour market."
Back to the positive news regarding the PMIs for Europe and both France and Germany were the main focus of attention…
It would appear that the French finance minster was not being too hasty with his judgment that Europe's second largest economy was now out of recession. Markit reports that the French private sector PMI rose to 48.8, up from June's 47.4, this is now a seventeen month high suggesting the private sector shrank fractionally and by the slowest margin in seventeen months. France's manufacturing sector, with a PMI of 49.8 (up from 48.4 in June), very nearly stumbled over the median line of 50 (which indicates growth), another 17-month high, whilst the service sector improved at 48.2 from 47.2. Markit reported that;
"Service providers indicated a slower fall in outstanding business, while manufacturers reported a rise for the first time since April 2012. The rate of job shedding in the French private sector moderated further in July. The latest fall in staffing levels was the slowest in 15 months. Both service providers and manufacturers signalled weaker reductions in employment.
"Output in the French private sector moved closer to stabilisation at the start of the third quarter. Manufacturers actually signalled a rise in output for the first time in almost one-and-a-half years, while service providers registered a slower decline in activity."
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German data published courtesy of Markit was equally encouraging. The German private sector posted its highest output level in five months. The Flash Germany PMI level rose to 52.8, from June's 50.4, this is the highest level witnessed since February 2013. Germany's factory sector returned to growth, the 50-point median level came in at 50.3 versus June's 48.6. Germany's service sector PMI grew from 52.5, from 50.4. Tim Moore, analyst at Markit stated that;
"The return to new business growth sets a positive tone at the start of the third quarter and a rebound in employment numbers adds to the air of positivity in the latest figures. The stronger performance of the German private sector in July appears to have been driven by improvements in domestic business and consumer spending. In particular, manufacturers cited higher demand patterns from the autos industry and among clients in the domestic construction sector, which helped offset continued weakness in key export markets."
Overall European data, provided by Markit's composite PMI output index, hit its highest level in over 18 months. The rise was up to 50.4, up from 48.7 in June, the first time it's broken above the 50.0 level since January 2012. Markit reports that new orders fell marginally, whilst job losses eased.
Naturally these positive data prints from Markit have encouraged the European bourses to rise in the morning trading session. Attention will now turn to the USA Markit information – the flash manufacturing PMI, in the hope that the USA is also on a sustained growth trajectory.
Should there be a note of caution in relation to the encouraging European PMI numbers?
Two issues stand out. Firstly we're being optimistic over many prints that are still falling below the fifty mark, which indicates growth over contraction. In many instances we're citing that contraction has slowed and that economic 'shrinkage' is slowing, it could be argued that Europe is simply failing better. Despite the accuracy and reliability of Markit's data it is not the 'official' data. Analysts will be looking for the official outlets, such as Eurostat, to mark time as to when Europe finally exits recession.
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Secondly we'd need to see a trajectory whereby the data prints coming in at 47-49 begin to cross the rubicon of 50 over the next few months, only then could we begin to imagine what was deemed impossible as recently as Feb-March; that the Eurozone and wider Europe was creeping out of the recession it's been mired in for several years.
Market Overview at 10:45 UK time
In the overnight/early morning Asian-pacific session the Nikkei closed down 0.32%, the Hang Seng closed up 0.24% whilst the CSI closed up 0.36%.
The UK FTSE is currently up 42 points or by 0.62%. The French CAC index is up 0.78%, the DAX is up 0.5%, the IBEX is up 0.78%, whilst the STOXX index is up 0.75%.
Looking at commodity prices spot gold is down 0.29% at $1341 per ounce. WTI oil is down by 0.08% at $107.14 per barrel, whilst NYMEX gas is down by 0.67% at $3.72.
Forex Focus
Europe’s seventeen nation shared currency rose versus nearly all of its major trading peers due to the positive European purchasing managers’ indexes. The Aussie dollar fell for the first time in the last four days' trading sessions versus its U.S. counterpart as a consequence of data revealing a contraction of manufacturing in China, which is Australia's largest biggest trading partner and key export destination.
The euro rose 0.1 percent to $1.323 in the London session, after reaching $1.3255, the highest level witnessed since June 20th. Europe’s currency rose 0.8 percent to 132.49 yen, reaching a two-month high of 132.61 yen. The Greenback rose 0.7 percent to 100.10 yen. Australia’s currency dropped 0.9 percent to 92.13 U.S. cents. It reached 89.99 U.S. cents on July 12th, the lowest level witnessed in close on three years, down from a 2013 high of $1.0599 on Jan. 10th.
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