London View

Damp Equity Markets Despite Decent Euro Zone PMIs

European equities out of favour with market participants Tuesday who prefer the comfort of safe-haven core government bonds with UK gilts and German bunds seeing flow. Gold too – recovering from recent declines which have pushed it firmly under the $1300 mark. FX markets subdued with EURUSD holding steady around 1.38 while cable remains firm above 1.68. US stocks rose Monday, helping lift Asian share markets overnight before the release of HSBC’s manufacturing PMIs out of China.

The data was broadly in line with expectations, with the index at 48.3 in April, below the 50-mark which signifies contraction – although not a huge surprise, the reading reconfirms the country’s factory activity is stuck in a slowing trend [this the fourth consecutive month] which is showing little signs of recovery. Lawmakers in China have the firepower to inject stimulus – widely anticipated by markets – and this number will only serve to reinforce the need for stimulus if Chinese growth for 2014 is to remain above 7.5%. Chinese stocks fell in response to the report but the rest of the Asian region held up which geared European markets up for a firmer start.

Indeed, equity markets in Europe tracked slightly higher at the open on the overnight leads but market participants soon removed cash off the table on the back of Monday’s strength in regional markets and ahead of the euro zone composite PMIs. The reading was better than expected – both manufacturing and services in the euro zone rose in April to 54 from 53.1 in March – that’s a 35-month high.

Within the data, the composite employment index rose too as well as the composite new orders sub-index – the data raises expectations of euro zone GDP in Q2 to come in between 0.4% to 0.6%. French PMIs were not great but remained above the 50-mark but Germany of course advanced. That being said, deflationary worries remain a threat to the euro zone recovery – price pressure remains weak and the economic recovery in the euro zone is still fragile.

Today’s PMI’s do not ease any pressure on the ECB to act with stimulus measures in forthcoming months. Markets are still expecting a big bazooka Fed style QE programme by the ECB – today’s data propped up the euro, which again will worry the central bank. Looking ahead, the focus shifts to US housing data together with another round of high profile US earnings from the likes of Apple, Facebook, Boeing, Procter & Gamble and Texas Instruments.