European markets look to continue apace this morning

Good morning,

European markets look to continue apace this morning, following on from a largely mixed Asian session which saw the Shanghai composite fall 0.35%, yet the Nikkei rose 0.76%. The dominant themes through the overnight session centered around the Australian CPI fall, along with the marginal rise in the HSBC manufacturing PMI figure. It is the latter which is expected to feed into the European markets, where futures point towards a largely higher open with the CAC +3, DAX +21, yet the FTSE100 -5 points.

Today’s HSBC manufacturing PMI out of China has been widely followed for this reading has acted as the prime indicator of the recent economic slowdown within the Asian powerhouse. The move into contraction over the past three months within the manufacturing sector as measured by this figure has heightened fears of a more widespread crisis, where the reliance upon credit and easy money as a core driver of economic growth could finally be coming to an end, with significant consequences for the global economy. However, there is a distinct possibility that China will choose to monetise away this problem in much the same way it has in the past and that appears to be the case now. With the reading finally posting a positive increase following six months of decline, this can be seen to some as a mini victory and a step in the right direction. However, with both the PBOC and government having stepped in with stimulus efforts, today’s efforts are somewhat unimpressive.

The focus within the HSBC reading upon small to medium sized businesses means that it was always likely for this measure to be impacted more significantly than the headline figure, which is centered upon more large-scale an d government backed firms. The decision from the PBOC and government that 2014 would represent the year within which they allow the overcapacity to be taken out of the system would invariably mean some paid in the near term. However, it seems as if there is actually less appetite for this than expected as stimulus has greeted pretty much any period of relative weakness. That being said, following the recent ‘mini-stimulus’ measure from the government, their stance is now that no further action will be taken to prop up the economy in what is perceived as a temporary slowdown. This would represent a major change in tact should it play out, yet prior performance typically shows us that when faced with dipping popularity due to economic worries, the government will more often than not step in.

In Australia, the Aussie dollar fell to a two week low after the inflation rate fell to 0.6% on a month on month basis. This unexpected tumble in prices caught the markets off-guard somewhat, bringing about a more concerted sell-off in what has been one of the strongest currencies of recent weeks. The wider impact of this figure is likely to mean an RBA which holds off somewhat in terms of their next interest rate move, which was expected to be a hike. The move towards a disinflationary stage for Australia is consistence with many of the other major economies such as the UK, US and Eurozone. In much the same manner, the move towards a low inflation environment bring a number of issues, not least the fact that a contractionary monetary policy would be likely to exacerbate the problem and could drive a move towards deflation. For now this figure can be taken in isolation, yet should we continue upon this path then the expected rate hike around mid-2015 would likely have to be pushed back further.

In Ukraine, the crisis appears to be worsening, with the Russians appearing to disregard their pledge to call upon pro-Russian separatists to pull back from the key governmental buildings which have been occupied in recent weeks. This is an unsurprising development given that many of these people have been clearly led by Russian commanders in unmarked uniforms. However, as the world considers whether sanctions are likely and in what form they would have, the US has decided to embark upon their own military ‘drills’ in the region in a clear show of willingness to bring a military presence to the table. The torture of two people by pre-Russians yesterday only served to feed into the current tensions in the region and yet the markets appear to be taking little notice for now. There is largely due to the fact that many of the major western economies involved would be unlikely to shoot themselves in the foot with effective sanctions given the reliance upon Russia as a key trade partner. Thus in all likeliness, Russia will continue with it’s master plan irrespective of blunt threats from the EU and alike, with this issue set to roll on for some time now.

Looking ahead, the European session is likely to be dominated by the release of both manufacturing and services PMI figures from some of the major Eurozone economies, followed closely by the BoE minutes and votes from the meeting earlier this month. Unfortunately the BoE minutes and votes are somewhat of a non-event nowadays given the relative stability brought about under Mark Carney. However, the existence of the manufacturing PMI release from the US in the afternoon is likely to signify a fairly busy and possibly volatile day.