If last week's disappointing global economic data, that saw Brazil added to the list of countries returning to outright recession [28]as Europe Hamletically debates whether to be or not to be in a triple-dip, was enough to push the S&P solidly above 2000, even if on a few hundreds ES contracts (traded almost exclusively between central banks [29]), then the overnight massacre of global manufacturing PMIs - when not one but both Chinese PMIs missed spurring calls for "more easing" and pushing the SHCOMP up 0.83% to 2,235.5 - should see the S&P cross Goldman's revised year end target of 2050 (up from 1900) sometime by Thursday (on another few hundreds ES contracts).
Some of the highlights, or rather lowlights: Dutch PMI 51.7, down from 53.5, Hungarian PMI 51.0, last 56.7; Spain PMI 52.8, Exp. 53.3, Last 53.9; Czech PMI 54.3, Exp. 55.5, Last 56.5; Swiss PMI: 52.9, Exp. 53.7, Last 56.5; Sweden PMI 51.0, Exp. 54.8, Last 55.1; Italy PMI 49.8, Exp. 51.0, Last 51.9 (back into contraction mode to go along the GDP decline and the record low inflation), French PMI 46.9, Last 46.5, Germany 51.4, Exp. 52.0, and Last 52.0 and finally the UK at 52.5, exp. 55.1, and last 54.8, was the lowest reading since June 2013.
Some more observations from Goldman: on Europe's absolute manufacturing disaster:
The Euro area final manufacturing PMI printed at 50.7 in August, 0.1pt below the Flash and the consensus estimate (Flash, Cons: 50.8). This implies a 1.1pt contraction from the July print. The French component was revised up relative to the flash (+0.4pt), while the German component was revised down (-0.6pt). The August figure in both Italy and Spain showed continued loss of momentum, with the manufacturing PMI easing 2.0pt in Italy and 1.0pt in Spain relative to the July print (against a consensus expectation of a smaller decline).
- The Euro area aggregate Final manufacturing PMI printed at 50.7, 0.1pt below the August Flash owing to a considerable 0.6pt downward revision in Germany, outweighing a 0.4pt upward revision in France.
- The breakdown of the manufacturing PMI reflected the weaker headline print: New orders fell 1.4pt to 50.7 while stocks remained stable, thus implying a 1.3pt contraction in the forward-looking order-to-stocks ratio. Employment edged 0.6pt lower and remains relatively weak at 49.3. Output also declined by 1.7pt, now standing at 51.0.
- The Euro area manufacturing PMI now stands 5.7pt below the peak it reached in January. The manufacturing PMI for the Euro area is now roughly back to the levels seen around a year ago. That said, the PMI remains around 7pt above its low observed around mid-2012.
- Relative to the July print, the Final August manufacturing PMI shows a 1.0pt fall in both Germany (to 51.4) and France (to 46.9). The Italian manufacturing PMI fell by 2.0pt (to 49.8) against expectations of a smaller contraction (Cons: 51.0). The Italian PMI has eased 4.2pt since its recent peak in April, pointing to further weaknesses in Italian manufacturing activity. Its Spanish counterpart also declined by 1.0pt but remains a higher level of 52.8 (Cons: 53.3).
- Developments outside the major Euro area economies were mixed: the Dutch PMI declined 1.8pt (to 51.7). But the Greek PMI rebounded robustly by 1.4pt to 50.1 and the Irish PMI showed a strong gain of 1.9pt (to a very robust 57.3).
So in the aftermath of so much bad news which "guarantees" (at least according to the sellside penguinry) that Draghi will have no choice but to ease further this week, we are stunned to find Europe not hitting new record highs: according to RanSquawk, European equity markets trade in minor negative territory, as tentative sanctions risk and continued conflict in Eastern Europe sends stocks lower.
Furthermore, poor Eurozone data in the form of German, Italian and Spanish Manufacturing PMIs highlighted the continued challenges faced by Eurozone policy makers and central bankers. The FTSE-100 underpeforms after Goldman Sachs downgraded Royal Dutch Shell to neutral from buy at Goldman Sachs. Nonetheless, the Swiss Market Index has shrugged off the concerns as blue-chip Novartis trades at record highs after their experimental heart failure drug reported very strong results on Saturday. 11 of 19 sectors rise, led by healthcare. 46% of Stoxx 600 members gain, 52% decline. Eurostoxx 50 +0.2%, FTSE 100 -0.1%, CAC 40 -0.4%, DAX -0.3%, IBEX -0%, FTSEMIB -0.5%, SMI +0.7%.
Asian markets have been edging on the front foot overnight despite these headlines. The Nikkei is up by about 0.2% whilst China is up by about four-tenths of a percent as we type despite an overall softer Chinese PMI manufacturing report for August. The headline came in at 51.1 versus expectations of 51.2 but we saw broad based weakness in the details. Output (53.2 v 54.2) and new orders (52.5 v 53.6) were both lower on the month. Backlog order (45.9, down 0.5ppt), raw material inventory (48.6, down 0.4ppt), and employment (48.2, down 0.1ppt) sub indices also fell deeper into contractionary territory. Away from the official reading, the HSBC variant’s final print for August came in at 50.2 also slightly below the flash reading of 50.3. In core rates markets, Treasuries are steady with the 10yr yield holding at around 2.34%.Asian stocks rise with the Nikkei outperforming and the Kospi underperforming. MSCI Asia Pacific up 0.1% to 148.1. Nikkei 225 up 0.3%, Hang Seng up 0%, Kospi down 0%, Shanghai Composite up 0.8%, ASX up 0.1%, Sensex up 0.9%. 7 of 10 sectors rise, led by utilities and tech.
There is, of course, nothing on the US calendar today due to the labor day holiday which means all that Central Bank money on the sidelines will have to wait until 6 pm to buy ES.
Market Wrap:
- Stoxx 600 little changed at 342.1
- German 10Yr yield down 1bps to 0.88%
- MSCI Asia Pacific up 0.1% to 148.1
- Gold spot up 0.1% to $1289.6/oz
- U.S. mkts closed for Labor Day holiday
Bulletin Headline Summary
- European equities retreat as German, Italian and Spanish PMIs are revised lower, dashing hopes of a rebound in this week’s Eurozone GDP figures
- Lower-than-expected Chinese manufacturing PMI spurs renewed talk of policy easing from Beijing in order to stimulate the domestic economy towards accepted growth levels
- US markets to remain closed today for Labor Day, with early electronic closes listed below:
FIXED INCOME
Bund futures opened flat on little overnight cues, however began to gain momentum as the German, Italian and Spanish Manufacturing PMIs all missed expectations. Nonetheless, Friday’s PM highs are still yet to be tested at 151.66 as very light volumes keep Bunds from gaining too much momentum. Peripheral yield spreads trade marginally tighter, as early bets are placed on easier ECB policy at Thursday’s rate decision.
EQUITIES
European equity markets trade in minor negative territory, as tentative sanctions risk and continued conflict in Eastern Europe sends stocks lower. Furthermore, poor Eurozone data in the form of German, Italian and Spanish Manufacturing PMIs highlighted the continued challenges faced by Eurozone policy makers and central bankers. The FTSE-100 underpeforms after Goldman Sachs downgraded Royal Dutch Shell to neutral from buy at Goldman Sachs. Nonetheless, the Swiss Market Index has shrugged off the concerns as blue-chip Novartis trades at record highs after their experimental heart failure drug reported very strong results on Saturday.
FX
Overnight, the USD-index extended on Friday’s gains to trade at levels not seen since July 2013, which saw EUR/USD test a touted option barrier at 1.3100. Nonetheless, the EUR recovered from the day’s lowest levels after the lowest UK Manufacturing PMI reading since Jun’13, lifting EUR/GBP well away from the YTD lows of 0.7874. Furthermore, EUR/GBP also fell after CaixaBank’s purchase of Barclays’ EUR 800mln Spanish books.
After the poorer-than-expected Chinese manufacturing PMIs, the antipodean currencies (AUD, NZD) recovered after better than expected NZ terms of trade data while AUD holds its ground ahead of tomorrow’s rate decision.
COMMODITIES
WTI and Brent crude futures trade in modest negative territory as the USD hit the highest level since July 2013, weighing on USDdenominated commodities. Spot gold and silver slightly outperform as the belligerent tones from Russian President Putin keep the sanctions play alive, prompting further upside in palladium, which hit the highest price since 2001.
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DB's Jim Reid concludes the overnight recap:
Where did the summer go? Welcome to September after a fairly buoyant August that we'll review at the end in our usual monthly (and YTD) performance review. All charts and tables are in the pdf. Today will probably see large amounts of people return from holidays but with the US off for Labor Day then market's will probably start the week relatively slowly before building to a crescendo with what is likely to be a fascinating ECB meeting on Thursday (DB expect ABS 'Private QE') and payrolls in the US on Friday. I'm returning after two weeks away where I've had the wonderful rarity of sleeping for around 8 hours a day. Sadly that's gone back down to 6 hours as of last night. It was a lovely break with lots of cycling, hiking and eating. I also did my first ever paraglide off a mountain which was a 40th birthday present from my team and a little scary. As I was up in the air I was wondering whether they were trying to find a way of getting rid of me. I also did lots of yoga and practised piano most days. Indeed I think I've come on enough in both that I can now play the keyboard in the lotus position with my toes!!
Markets will be have to be on their toes as the week progresses as ahead of the ECB and payroll there is a fair bit of front line data to come to terms with. The Chinese PMI has already kick started the day with a largely in-line headline number of 51.1 although details were generally on the soft side (more later). However the main story is likely to come from Mr Draghi this Thursday as the possible announcement of private 'QE' could mark one of the most important events for markets into year end. Our European economists’ base case is that we will get it this week although they acknowledge that it is a very close call. There seems to be an inevitability that QE is coming in some form but the ECB may decide to wait a while longer still to see the impact of their previous policy moves. On balance though DB's Mark Wall and Gilles Moec expect the announcement of an ABS purchase program to complement the TLTRO. While the programme is unlikely to be technically ready they expect the ECB to ‘firmly commit’ to it this week. As always Draghi’s Q&A will be the most interesting section where he will likely come under pressure to be more explicit on government bond purchases (sovereign QE). Mark and Gilles continue to think that the ECB “would rather not” engage down such a route (given the legal and political ramifications as well as the technical uncertainties), but they think Draghi cannot appear too dismissive on the prospect that such a “last resort weapon” could be used for fear of upsetting the market. So expect a dovish sounding ECB President.
But before all that, the main weekend headlines were largely centred on the escalation of the Ukraine crisis as Europe prepares to ramp up sanctions against Russia warning that its invasion of east Ukraine was risking a state of war with Europe. Following a meeting with Poroshenko over the weekend, European Commission President Barroso noted that "we may see a situation where we reach the point of no return if the escalation of the conflict continues". This also comes after some strong words from Putin last Friday stressing that Russia is a strong nuclear power and Russia's partners should understand it is "best not to mess with us". In a weekend TV interview Putin has also provokingly called for talks on the ‘statehood’ of southeast Ukraine.
Separately, the WSJ reported that Ukraine lost more ground to separatists in eastern Ukraine on Sunday although Ukraine managed to swap 10 Russian soldiers captured last week for 63 Ukrainian troops who crossed into Russia. The WSJ also reported that Poroshenko will have new round of talks with rebels and Russian officials in Minsk today which hopefully will yield some progress toward a cease fire. In the US, some Senators are urging the US to provide Ukraine weapons as a defensive measure.
We will continue to monitor these geopolitical headlines but for now Asian markets have been edging on the front foot overnight despite these headlines. The Nikkei is up by about 0.2% whilst China is up by about four-tenths of a percent as we type despite an overall softer Chinese PMI manufacturing report for August. The headline came in at 51.1 versus expectations of 51.2 but we saw broad based weakness in the details. Output (53.2 v 54.2) and new orders (52.5 v 53.6) were both lower on the month. Backlog order (45.9, down 0.5ppt), raw material inventory (48.6, down 0.4ppt), and employment (48.2, down 0.1ppt) sub indices also fell deeper into contractionary territory. Away from the official reading, the HSBC variant’s final print for August came in at 50.2 also slightly below the flash reading of 50.3. In core rates markets, Treasuries are steady with the 10yr yield holding at around 2.34%.
Previewing the rest of the week ahead, in the US we have the ISM manufacturing on Tuesday, with markets expecting a broadly unchanged reading of 57.0 for August although prices paid are expecting to decline modestly. We then have ADP on Thursday (a day later than usual) ahead of Payrolls Friday. On Payrolls specifically, our US economists think it will take on even greater significance than usual ahead of the September 16-17 FOMC meeting especially given the moderation of several key data series (retail sales, personal consumption, inflation). On that note, DB is looking for a NFP headline of +200k and the unemployment rate to decline a tenth to 6.1%. More on this later in the week.
In Europe, we get the final PMI manufacturing reading for the Euroland, Germany and France today but also fresh readings for Spain and Italy. This will create lots of headlines ahead of Thursday. Euroland PPI for July will be the only notable data tomorrow followed by the round of services PMI across Europe on Wednesday. German factory orders (Thurs) and IP (Friday) are data highlights later this week. We also have BOE’s policy decision on Thursday but despite some twitches from the MPC of late the meeting will almost certainly be overshadowed by the ECB.
