Those wondering why European stocks are higher but off earlier highs, the answer is simple: the latest Service ISM was bad but it wasn't a complete disaster. And while RanSquawk notes that "the particularly disappointing slew of Eurozone Service PMI’s from France and Spain capped any potential upside seen across the European indices" stocks are clearly green on hopes Europe's ongoing economic devastation accelerates enough for the ECB to finally start buying Stoxx 600 and various other penny stocks, which in turn magically "trickles down" to Europe's record youth unemployment.
This is what happened, in Goldman's words: the November Euro area final composite PMI came in at 51.1, 0.3pt below the flash (and Consensus) estimate. Relative to October, the composite PMI fell by 0.9pt. The weaker final composite PMI was driven by flash/final downward revisions to the German manufacturing PMI and the French services PMI. Today’s data also showed some improvement in the Italian services PMI, and a deterioration in its Spanish counterpart.
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November's final manufacturing PMI (published on Monday) came in 0.3pt below the flash reading. This was driven by a downward revision (0.5pt) to the manufacturing PMI in Germany (the French manufacturing PMI flash/final revision was positive). The final Euro area services PMI for November was 0.2pt below the flash, with the flash/final downward revision driven by the French services PMI (revised down 0.9pt).
With these revisions, relative to October, the Euro area composite PMI fell by 0.9pt (to 51.1), reflecting a 0.5pt decline in the manufacturing PMI (to 50.1) and a 1.2pt decline in the services PMI (to 51.1). The breakdown of forward-looking components was mixed. New manufacturing orders fell by 0.8pt to 48.7, while stocks edged down by 0.9pt on the month, leaving the orders-to-stocks ratio stable. The forward-looking elements of the services PMI showed 'incoming business' declining by another 1.1pt, while the 'business expectations' subcomponent rose by 2.4pt.
The Composite PMIs declined across all major countries on the month, except in Italy. The abrupt fall in the German composite PMI (by 2.2pt to 51.7) owed to sizable 2.3pt and 1.9pt declines in the services and manufacturing PMIs respectively. In France, the 0.4pt fall in the composite PMI (to a weak 47.9) was driven by a similar-sized contraction in the services PMI. The Spanish services PMI eased notably by 3.2pt to 52.7 (Cons: 55.2), leading to a 1.7pt decline in the composite PMI (to 53.8). By contrast, in Italy, while the manufacturing component was unchanged on the month (at 49.0), the services PMI recorded a 1.0pt expansion (to 51.8, Cons: 50.2), driving the composite PMI 0.9 up to 51.2.
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In terms of fixed income, the Bund remains relatively unchanged but has since ebbed higher alongside the weak European data releases with some analysts also noting volumes rolling into the next contract ahead of the upcoming expiry on the 8th Dec.
In terms of the day ahead, we have ADP employment change today (consensus +222K) ahead of the all important payrolls on Friday. The US non-manufacturing ISM and the Fed’s Beige Book are the other key releases for today. On Fedspeak we have both Plosser and Brainard lined up for today. In Europe we will kick the day off with a host of services and composite PMI prints with final figures for Germany, France and the Euro-area. We will also get preliminary readings out of Spain, Italy and the UK.
To summarize:
European shares trade mixed, off earlier highs, with the basic resources and health-care sectors outperforming and oil & gas, food & beverage underperforming. Ruble touches record-low for fifth straight day. Euro-area services and manufacturing grew less than initially estimated last month. Italian 10-year yields dropped below 2% for first time. U.K. budget statement later. The Spanish and Swedish markets are the best-performing larger bourses, U.K. the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; Spanish yields decline. Commodities gain, with wheat, natural gas underperforming and WTI crude outperforming. U.S. ISM non-manufacturing, mortgage applications, ADP employment change, nonfarm productivity, unit labor costs, composite PMI, services PMI due later.
Market Wrap
- S&P 500 futures down 0.1% to 2064.1
- Stoxx 600 up 0.4% to 348.8
- US 10Yr yield down 0bps to 2.29%
- German 10Yr yield up 0bps to 0.74%
- MSCI Asia Pacific down 0.2% to 139.8
- Gold spot up 0.5% to $1204.2/oz
Bulletin Headline Summary from RanSquawk and Bloomberg:
- European equities trade mostly in the green, although this morning’s slew of Eurozone service PMIs have done little to restore faith in the area’s growth prospects.
- Treasuries steady before ADP report provides first look at November payrolls, est +222k; 10Y yields have risen almost 13bps this week amid $33.8b in IG issuance.
- Euro-area services and manufacturing grew less than initially estimated last month, leaving the economy facing near- stagnation as the ECB, which meets tomorrow, considers its options on further stimulus
- Russia’s economic pain worsened as a measure of services dropped to the lowest point since May 2009 and the central bank attempted to stem the ruble’s biggest slide in 16 years
- Kaisa Group Holdings Ltd. halted trading in Hong Kong after the real estate developer was blocked from selling some units in the southern Chinese city of Shenzhen, sending its stock down the most in more than a year; co.’s 2017 and 2020 bonds tumbled
- China’s services PMI rose to 53.9 last month from 53.8 in October while HSBC/Markit’s services gauge climbed to 53 from 52.9
- Growth at U.K. service companies expanded faster than economists forecast last month as new business improved
- Fed officials are signaling more confidence in the economy that moves them nearer to raising interest rates, and are stressing the liftoff is linked to data rather than dates to avoid unsettling markets
- Sovereign yields fall. Asian, European stocks gain, U.S. equity-index futures fall. Brent crude and gold rise, copper falls
- Looking ahead, today’s session sees the release of the US ADP employment
change figure, ISM non-manf. Composite, DoE oil inventories, BoC rate
decision and potential comments from Fed’s Plosser, Brainard and
Fischer.
US Economic Calendar
- 7:00am: MBA Mortgage Applications, Nov. 28 (prior -4.3%)
- 8:15am: ADP Employment Change, Nov., est. 222k (prior 230k)
- 8:30am: Nonfarm Productivity, 3Q final, est. 2.4% (prior 2%)
- Unit Labor Costs, 3Q final, est. -0.2% (prior 0.3%)
9:45am: Markit US Services PMI, Nov. final est. 56.5 (prior 56.3) - Markit US Composite PMI, Nov. final (prior 56.1)
- 10:00am: ISM Non-Manf. Composite, Nov., est. 57.5 (prior 57.1)
FX
In FX markets, the USD-index continues yesterday’s strengthening theme now trading at its highest level since March 2009. Moreover, EUR/USD continued its recent descent following the disappointing Spanish and French Service PMI data with the pair breaching below the Nov. 24th & 7th reaching its lowest levels since Aug. 2012. In addition, the pair has seen some further weakness with UBS cutting their 2015 year-end EUR/USD call to 1.1500 from 1.2000, suggesting that QE from the ECB may came in March 2015. Furthermore, the RUB once again printed record lows vs. USD, however, the pair stages a fast-money move lower, with nothing fundamental behind the move, although the usual talk of central bank intervention has been doing the rounds.
COMMODITIES
In terms of the commodity complex, WTI and Brent crude futures enter the North American crossover in the green in a continuation of the move seen following yesterday’s API inventories which revealed a 6.5mln bbl drawn-down in stockpiles vs. last week’s build of 2.8mln. However, in the aftermath of last week’s OPEC decision, the Kuwait oil minister has been on the wires saying Kuwait will not sacrifice its interest to cut oil output, according to minister and it is pointless for OPEC to cut output while others increase. In terms of precious metals markets, commentary remains relatively light with price action largely dictated by movements in the USD-index after it made a technical break above 88.71, which has subsequently seen spot gold extend its move above the USD 1,200/oz level.
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DB's Jim Reid Concludes the overnight recap
All in all yesterday turned out to be a rather positive day for risk assets despite the retracement of Monday’s rally in Oil. Risk sentiment was supported by the better-than-expected auto sales for November along with what was also viewed to be a reasonably decent day for US economic releases. We’ll briefly touch on these below but in terms of specific market moves yesterday was the first up day for the S&P 500 (+0.64%) since Thanksgiving and also a fresh high for the Dow (+0.58%). Interestingly, Energy (+1.33%) was the best performing S&P 500 sector despite the weakness in Oil. As for Oil, yesterday saw WTI (-3.1%) and Brent (-2.7%) give back bulk of Monday’s gains to finish the day at around $66.9/bbl and $70.5/bbl, respectively.
Moving on to the fixed income side of things it was a reasonably firm day for Credit as well. Certainly an active day for US primary markets as investors absorbed US$12.5bn from 6 different issuers although more than half of those volumes from the TMT space. Away from new issues, IG secondary spreads were somewhat mixed (+/-2bps) although the CDX IG did manage to close just over half a basis point tighter on the day. US Treasuries weakened across the curve which saw the 10yr yield rise +6bps higher to 2.292%. The decent tone for risky assets probably didn’t help the performance in rates but investors were also reacting to comments from Fed’s Vice Chair Fischer yesterday.
Indeed speaking at a WSJ event yesterday, Fischer signaled that the FOMC is closer to removing the ‘considerable time’ language from its guidance. Although to be fair he also emphasised that policy tightening is still very much data dependent and particularly on labour market conditions as well as inflation. The next FOMC meeting on the 16-17 December will be the next key event for rate watchers but we can’t help to think that as far as inflation is concerned lower energy prices is probably giving global policy makers some breathing room for now.
Taking a brief look at the data flow, the US construction spending surprised to the upside in October (+1.1% mom vs +0.6% consensus), supported by the expected pickup in residential construction and also an improvement in government spending. The NY ISM manufacturing also came in at an impressive 62.4 versus 55.0 expected by the market. The top tier automakers in the US reported better-than-expected November sales, which points towards a seasonally adjusted annual rate (SAAR) of 17.2million light vehicles. This was ahead of what the market was looking for (16.7million) and also marks the strongest performance since 2003 (per Reuters).
It was interesting to see that lower gasoline price was cited as one of the drivers behind the auto sales strength in November. So there are sectors that are seemingly benefitting from lower cost of fuel after all but the collateral damage is still very much being felt by others such as the oil drillers. Per the FT, Schlumberger is cutting back its fleet for offshore geological surveys and taking an $800m writedown on the value of its ships. This apparently marks the first significant cutback in the industry following the recent sell off in Oil.
The company also plans to cut jobs as oil related capex is expected to slow. On a similar theme but away from Oil, the weakness in commodities has also prompted Vale focus to sell off 30-40% of its base metals business. The company said that the base metal division will probably be listed in Canada next year (where Vale’s nickel assets are concentrated) and the IPO timing could be after August 2015.
Back to markets, Asian equities are coming off their earlier highs as we type although most North Asian bourses are still in the green. The Shanghai Composite is now flat after having been up as much as 2% earlier following modest gains in China’s services sector data. The official non-manufacturing PMI rose to 53.9 in November from 53.8 in October. The HSBC variant rose to 53 from 52.9 from October. Away from China, the Nikkei is also now flat although the KOSPI and ASX is still 0.2% and +0.7%, respectively. Australia’s disappointing GDP report drove the AUD to a four year low (83.98 as we type). Asia IG credit spreads are firmer on the day with cash spreads 1-2bp tighter across most benchmark names.
Taking a quick look at Europe the Stoxx 600 (+0.50%) also had a decent day with similar gains seen in energy stocks. Credit spreads were modestly firmer with Xover closing some 4bps tighter. There was however no respite for the Russian Ruble. The currency lost another 4.5% against the US Dollar (to 53.97) to extend its most severe decline since 1998 when the country defaulted on its internal debt. The moves also coincided with a GDP downgrade from Russia’s deputy economy minister Alexei Vedez. He now expects Russian GDP to contract 0.8% next year versus a previously forecasted growth rate of 1.2%. Staying on Russia, Eastern European countries have also reacted negatively towards Russia’s decision to terminate its US$50bn South Stream Gas project. So with the weakness in the currency, flow on impact on the economy and ongoing geopolitical developments we suspect Russian headlines will likely linger well into the new year.
Wrapping up Europe and perhaps flagging another potential Q1 market driver next year, Greece’s Syriza leader Alexis Tsipras yesterday reiterated his promise to exit the bailout should he be elected. He went on to say that Greece’s access to bond markets is being hindered by high debt levels and as a result a debt haircut is needed. The comments came after discussions between Athens and Troika arriving at a standstill and with time running out before the 8th December Eurogroup meeting.
In terms of the day ahead, we have ADP employment change today ahead of the all important payrolls on Friday. For the record our US economists have a slightly more bullish view than consensus on ADP (240k v 222k expected by the market). The US non-manufacturing ISM and the Fed’s Beige Book are the other key releases for today. On Fedspeak we have both Plosser and Brainard lined up for today. In Europe we will kick the day off with a host of services and composite PMI prints with final figures for Germany, France and the Euro-area. We will also get preliminary readings out of Spain, Italy and the UK.
