With America shut for Thanksgiving today, what was going to be an abysmal volume day, coupled with the usual any news is good news levitation following the lowest volume day of the year, will be even worse. Sure enough, the overnight session started off with a bang, when in the vacuum of night, a lift everything algo sent the EURUSD soaring by 40 pips higher on no news. With the entire risk complex firmly anchored to the EURUSD pair as the key driver, it pushed risk across the entire market well higher to set the early session mood with the very first trade.
Followed light trading and a gradual drift lower which could not be offset even with a China HSBC Flash PMI print of 50.4, up from 49.5 in October, and the first 50+ print in 13 month (to accompany the new political regime: after all, the US is not the only nation where economic data mysteriously levitate with key political events).
This continued until about Europe open, when the monthly release of European PMIs came out, which once again were confusing to say the least with France posting the biggest and most surprising pick up, after its Manufacturing PMI rose from 43.7 to 44.7, on expectations of 44.0, while the Services PMI increased from 44.6 to 46.1, well above the expected 45.0 print. Germany was less exuberant with manufacturing rising from 45.5 to 46.2, although the Services PMI dropped from 48.4 to 48.0, missing expectations of 48.3, sending the series to its lowest in 41 months.
This is how Markit described the ongoing recessionary contraction for Germany:
November data indicated that the combined output of the German private sector dropped at a broadly similar pace to that seen in the previous month. However, this masked divergent trends in the performance of the manufacturing and service sectors, with the former posting a slower drop in output compared with October while the latter registered its fastest contraction since June 2009.
The seasonally adjusted Markit Flash Germany Composite Output Index registered 47.9 in November, only fractionally higher than October’s 47.7 and below the neutral 50.0 value for the seventh successive month. While the latest reading for services activity (48.0) pointed to a moderate pace of contraction, this was the weakest outturn for almost three-and-a-half years. At 47.7 during November, the equivalent index reading for manufacturing output was up since October and well above July’s 39-month low (42.2).
Another overall reduction in German private sector output reflected an ongoing contraction in new business volumes. Lower levels of new work have now been recorded in 15 of the past 16 months. Manufacturers and service providers indicated broadly similar rates of decline but, as with output, there was a divergence in momentum compared with that seen in October. Service providers posted the steepest decline in new business for three months, while the drop at manufacturers was the slowest since March. The latest drop in new export orders received by manufacturers was the least marked for six months, which some firms linked to support from stronger demand in China.
Shrinking new business volumes in the service sector contributed to a steep drop in expectations for activity over the next 12 months. The index measuring service providers’ business expectations was the lowest since March 2009.
German private sector employment dropped at the sharpest pace since January 2010. A softer fall in manufacturing staffing levels was offset by the most marked decrease in services jobs for three-and-a-half years.
Meanwhile, backlogs of work in the German private sector dipped for the seventeenth successive month in November, suggesting an ongoing lack of pressure on operating capacity. While the rate of decline in outstanding work eased in the manufacturing sector, the latest reduction at service providers was the steepest for a year.
In other words, the German growth dynamo which is the only thing keeping the Eurozone alive, continues to grow dimmer with each passing day. And what does the market do? It punishes Germany, by sending the EURUSD even higher, touching an overnight high of 1.2880, and making German exports outside the European Union (where German exports are funded by German TARGET2 claims anyway so it is a net wash), even more difficult. At this rate we expect the official onset of the German depression send the EURUSD north of 1.50, courtesy of centrally planned markets.
In other news Spain sold some sovereign bonds with maturities ranging from 2015 to 2021, to its banks which were then promptly repoed to the ECB with no haircut, or perhaps with a haircut: nobody really knows anymore what the ECB "mistake" is on Spanish collateral and if it has been fixed.
Europe will hold a summit today to discuss its hopeless budget, where Greece will likely be the true subject behind closed doors.
And that wil be all, once the European trading session closes in a few hours with America not there to step in and pick up the low volume levitation baton.
SocGen's FX team explains what else to look for today:
The JPY continues to animate G10 currency markets, but the reasons given for the follow-through selling that we are observing this week are becoming more spurious each day. The pro-stimulus rhetoric by LDP frontrunner Abe first hit markets last week, but it has been well and truly digested with no guarantee that the BoJ will actually adjust its policy principles and raise its 1% inflation target to fall in line with the politics of a PM elect. The moves of the last 24 hours can in all likelihood be traced back to investors' trading momentum, whilst USD/JPY purchases for hedging purposes related to the Softbank/Sprint deal are getting some credit as well. In any case, technically, the move looks like it has further to run until we reach the resistance zone around 83.19. The last time US/JA 2y rate spreads decoupled from spot to the extent we are seeing today was in Q109 when USD/JPY shot up from 94.50 to 100.72 and the 2y spread drifted in a 30-50bp range.
The Thanksgiving holiday in the US means reduced trading volumes across most asset classes today and tomorrow with the possibility of a squeeze in EUR/G10 if headlines break on Greece. The EU flash PMIs and bono auctions will draw attention where markets are open. A small rise in the PMIs is expected, but it is Germany where data has worsened most lately, so that's where the focus will be.
And sure enough, the deterioration continues, and will continue as long as a high EURUSD makes cheap German exports prohibitive, something which may have to be explained to the EURUSD traders at the BIS.
Finally, the big picture recap comes as usual from DB's Jim Reid:
Happy Thanksgiving to all our US readers, although you should be on holiday or at the early Black Friday sales rather than reading this. For the rest of us it’s a pretty interesting day ahead with October's flash PMI numbers being released in Europe and having already come out in China. Every month just as these numbers are about to be published, I can't help myself and internally sing "FLASH, saviour of the universe...." very loudly in my head. Glossing over the point that some things you should never publically admit to, the point is that the flash PMIs are a very important early indicator as to which way growth is moving across the globe.
Growth in Europe remains disappointing, especially (but not exclusively) at the core ironically, and markets have arguably run ahead of the hard data on the expectations that eventually the recent sovereign stability will translate into growth improvements next year. We still think Europe will get the benefit of the doubt for a few more months but risk markets are highly unlikely to be at these levels in 3-6 months time if the PMIs in Europe remain at current levels. We think they'll need to be low 50s at least not in the mid 40s region they are currently stuck at. So every month without a notable recovery in the PMIs is a worry even if the shortterm impact might be negligible.
While Euroland PMIs are still expected to be firmly in contractionary mode the Chinese readings seem to be heading towards the right direction. Indeed overnight we saw China’s HSBC Flash Manufacturing PMI rise 0.9pts to 50.4 in November which also happens to be the first >50 print for the series in 13 months. The underlying details of the report were also encouraging with the output subindex (51.3) reaching its highest reading since October 2011. Today’s release comes several weeks after the first >50 print in the official PMI in three months, adding further evidence that the economy is on the path to a near term recovery.
Buoyed by the positive Chinese data most Asian bourses are trading higher overnight. The Hang Seng and KOSPI up +0.5% and +0.9% respectively although
interestingly the Shanghai Composite (-0.5%) is the key laggard as we type. The Dollar index is a touch lower probably not helped by some dovish comments from Fed’s Williams. He expressed his preference on maintaining purchases of both MBS and Treasuries at the present pace even after the expiry of Operation Twist at year-end. Williams believes “a decision not to continue buying long-term Treasuries when Twist expires would be a surprise to markets and that would be counterproductive…and would push long-term rates up and cause financial conditions to be a little less supportive of growth”.
So despite the lingering fiscal cliff uncertainties investors are seemingly happy to add risk at these levels which helped the S&P 500 extend its consecutive up days to four. The index edged +0.23% higher yesterday but on very thin volumes ahead of Thanksgiving. Yesterday’s market was supported by reports that Israel-Hamas have agreed to an Egyptian-brokered ceasefire although how long will this last remains to be seen given reports that five missiles were fired from Gaza overnight after the truce was declared. Brent rallied +0.94% yesterday is holding steady at $110.9/bbl overnight after adding 0.94% yesterday.
Yesterday’s data flow was mixed. The better-than-expected US Markit PMI (52.4 v 51.0) came in at a six-month high. That lifted equities at the open although on a less positive note the final UofM confidence reading (82.7 vs 84.5) fell short of market expectations. Jobless claims are still feeling the effects of Hurricane Sandy with the latest reading still elevated at 410k but exactly in line with expectations.
A quick update on the ‘fiscal cliff’ debate it is interesting to see the growing number of worrying headlines around the state of negotiations. Politico noted that negotiations between the Democrats and the Republicans are off to a “rough start”, despite the cordial public statements made by both camps last Friday. The article suggests that the Republican’s opening proposal to “freeze the Bush-era tax rates, change the inflation calculator for entitlement programs, keep the estate tax at 2012 levels and authorize a major overhaul of the tax code” wasn’t something the White House could accept. At the same time, reports noted that Democrats are unwilling to make significant concessions to entitlements as demanded by Republicans. Indeed, in an op-ed piece in the Cincinnati Enquirer, Boehner wrote that “Obamacare has to go” suggesting a fairly hardline stance on entitlements. The slow pace of talks was also confirmed by the WSJ which described the negotiations as “inching forward” ahead of a likely meeting between Obama and congressional leaders when they return from Thanksgiving holidays next week. Fiscal cliff issues will remain a key driver for markets in the near term.
As mentioned at the start, flash November PMIs will be the key data flow in Europe today. We’ll kick off with France at 8am London where the market expects the manufacturing and services print to post a modest improvement to 44.0 (from 43.7) and 45.0 (from 44.6) respectively. We will get German numbers half an hour later with the market expecting the manufacturing and services sector readings to remain largely similar to October’s levels of 46.0 and 48.3 respectively. The Eurozone composite, manufacturing and services report will be out at 9am London and again expected to be broadly unchanged from October’s levels.
We also have the Eurozone Consumer Confidence reading for November. Elsewhere, the EU Summit convenes today to discuss the EU budget – although given the differences in opinion markets are probably not holding out high hopes of an agreement today. Away from Brussels we have a Spanish bond auction (2015, 2017 and 2021 maturities). Otherwise we should have a relatively quiet two days into the weekend with the US market closed today and an abbreviated session tomorrow.