With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.
Depending on who you ask, the overnight levitation (clearly on virtually no volume) in S&P futures to new record highs took place on either good news, namely a supposedly strong German PMI and a looming ‘de-escalatory’ meeting between Putin and Poroshenko, which would mean that the global economy is recovering which is bullish, or on bad news, namely China PMI missing and sliding, as well as Eurozone Mfg PMI which dropped from 51.8 and at 50.8, was below the 51.3 expected, Services PMI also missing expectations of 53.7, and declining from 54.2 to 53.5, leading to a 1 point drop in the Composite PMi from 53.8 to 52.8, which would mean that the global economy is stalling and more liquidity stimulus from central banks will be needed, which is also bullish. Bottom line: nobody knows what continues to push futures relentlessly higher (hint: moral hazard and endless stock buybacks), but whatever the news is, it’s good for stocks.
Regarding that Ukraine de-escalation, don’t tell that to local bonds, which continue to drop as the civil war death toll rises, and government seeks faster aid. The yield on the USD note maturing 2017 has risen 8 bps to 9.9%, after Ukraine yday asked to merge 3rd, 4th tranches of IMF loan. The obligatory spin: request to expedite IMF aid is positive as reduces liquidity risks, Bank of America analyst Vadim Khramov writes in e- mailed report today. Alternatively, it also means that the government may be about to run out of money.
A few notes on the latest European PMI from Goldman: The Euro area Composite Flash PMI contracted in August from 53.8 to 52.8, below our and consensus expectations, which pointed to a smaller contraction (Cons: 53.4, GS: 53.5). The decline was driven by weaker data in both the manufacturing and services components across the Euro area. The sizeable gap between the French and German composite PMIs narrowed 1.4pt on the back of an easing in the German PMI and an improvement in the French PMI.
- The Manufacturing PMI eased 0.9pt to 50.8. The services PMI declined slightly less (by 0.6pt) to reach a level of 53.5. The consensus expectation was for a smaller decline in both these components of the PMI.
- The breakdown was weak overall. The order-to-stocks ratio in the manufacturing survey eased 1.2pt on the back of stable stocks and weaker new orders. The forward-looking components in the Services PMI (where the headline figure is not aggregated up from the subcomponents) posted weak signals with ‘Business Expectations’ falling 3.2pt and ‘Incoming New Business’ improving marginally by 0.6pt.
- The details of the Flash PMIs for Germany and France showed a reduction in the divergence between the two countries (Chart 1). In France, the composite PMI edged 0.6bp higher and now stands at 50.0. In Germany, the composite PMI eased 0.8bp (to 54.9).This helped to narrow slightly the sizeable gap that has existed between the two countries since mid-2013 (Chart 2). As with the Euro area aggregate, manufacturing developed weaker than services in August in France and Germany.
- The area-wide figure released today (as well as the German and French equivalents) suggests a 2pt decrease in the services PMI in Spain/Italy and a decline of just below -1pt in the manufacturing PMI outside Germany/France.
- At 52.8, the Euro area composite PMI is consistent with around +0.4%qoq of GDP growth. For Q3 so far, the Composite PMI has averaged 53.3, similar to the Q2 average. At +0.0%qoq, Euro area Q2 GDP printed notably weaker than what the average PMIs in Q2 indicated.
Asian equities are trading generally lower across the board probably affected by the disappointing PMI data out from China. The HSBC China Manufacturing flash PMI for August fell more than expected to 50.3. The market was looking for a decline to 51.5 from 51.7 in July. The Shanghai Composite, Hang Seng, and the HSCEI indices are down -0.9%, -0.9% and -1.3%, respectively as we type. Other Chinese growth proxies such as the AUD and spot Copper are also weaker. Those with a bullish persuasion may say that a softer PMI print creates room for more stimulus but the market is clearly in profit-taking mode this morning after the strong run-up over the past few months. Japan is offering some shelter with local equities doing better this morning. Weighed by the FOMC statement yesterday the Dollar strength against the JPY is helping the Nikkei and TOPIX are both around +0.7% higher overnight. Treasuries are broadly stable overnight with the 10yr still being wrapped around 2.43% as we type. The stability in rates and the lack of new issue supply are offering some support for Asian credit overnight. Supply remains dry in that part of the world as Chinese and HK corporates carry on with their earnings affairs. Staying on EM, Fitch in an overnight report said that the external funding needs for EM Asian sovereigns with more vulnerable external finances are moderating. This is supporting the credit profiles of the likes of India, Indonesia, and Sri Lanka. In other news, in Thailand the general who led the coup has been named the new PM overnight.
European equities trade in minor positive territory, with minor outperformance in the Italian FTSE-MIB as markets buy into comments from a Kremlin spokesman, who stated that August 26th’s Minsk meeting with the Russian President Putin and Ukraine President Poroshenko is a step toward de-escalation. The IT sector is outperforming, as Infineon Technology benefit from the confirmation of their acquisition of International Rectifier for USD 3bln. Separately, the Austrian bank index trades higher after Raiffeisen Bank’s particularly strong earnings release. US stock futures trade higher, with the e-mini S&P briefly touching an all-time high of 1987.25.
