News

World Market Report - Sept 06, 2011

Europe Market Snapshot

Growth in the Eurozone's PMI service sector fell for the fifth consecutive month in August, expanding at its weakest pace in 2 years. A persistent downturn among smaller members of the EU-17-nation currency bloc is now spreading to core economies like Germany that have long supported the region's ‘fragile’ recovery. We feel that unless business conditions improve, the Eurozone economy risks contracting in Q4.

Eurozone PMI declined to 51.5 last month from 51.6 in July, its lowest reading since September 2009, but in line with an earlier flash reading. Optimism about the future also weakened with the business expectations index slumping to 57.6 from July's 63.4, its lowest reading since April 2009. Germany's services PMI fell to a 22-month low of 51.1 although France's moved up to 56.8, despite a PMI released on Thursday showing its manufacturing sector contracted for the first time in 2 years.

Yields on Italian and Spanish government bonds rose to near 1-month highs. Italian 10-year yields rose to their highest since August 9th at 5.467%, and well above the 5.00% level to which ‘recent’ ECB buying had pushed them. Spanish yields also rose to their highest in almost a month at 5.328. This week, Germany's Constitutional Court will deliver its ruling -- awaited for over a year -- on ‘claims’ Berlin is breaking German law and European treaties by contributing to multi-billion EUR bailouts of Greece, Ireland and Portugal. The German Bund future hit a record high at 137.73 and last traded up 95 ticks on the day at 137.59. Ten-year German yields were 7.6 bps lower at 1.91% having hit an historic low of 1.89%.

BREAKING NEWS:

Friday’s NFP release sends global markets tumbling:

Dow down 2.20%, S&P down 2.53% and Nasdaq drops 2.58%

Markets hotly anticipated the August US non-farm payrolls data, and even though there was a sense of trepidation the numbers were weak: Headline: ‘nil point’(cons: 68,000), private payrolls 17,000 (cons: 95,000). Even taking into consideration the Verizon strike (information -48,000), net downward revisions of 58,000, left the impression of a decidedly weak report. The household survey did show a 330,000 increase in employment and an unchanged jobless rate 9.1%, but the overall sense from the report is that Corporate America remains very cautious with regard to payrolls. Stock markets were disappointed. European markets that were already down tumbled into -3.0% territory virtually across the board. US markets were down around 2.0%. FX markets were more mixed, but there was still a distinct ‘risk off’ tone. CHF is again dominated (as the jobs data only increase the chances of more monetary stimulus in September capping USD gains) while the cyclical currencies lagged.

In the UK, the Bank of England meet, and will also have an opportunity to mull over IP data for July – recent trends have been far from impressive. QE in the UK could also come back onto the radar, though it is too early to expect this at this meeting. The next inflation report meeting is in November. Next week will be rich in German and Eurozone events. Industrial data will shed some light on the state of the German economy. We expect positive surprises from IP and exports. There is also the next ECB meeting. Interest rates will remain on hold but the big question is whether the ECB will drop its tightening bias. We expect that the ECB will downscale inflationary risks in its assessment. Finally, Germany's constitutional court will come up with its ruling on the legitimacy of the first Greek bailout package. A "no" decision would obviously rattle financial markets.

In Japan, machinery orders for July and the economy watchers survey for August provide the timeliest indication as to whether the pace of economic recovery is slowing.

Poland’s MPC meeting is in the coming week. Even dovish members are reluctant to consider rate cuts yet. We and consensus see flat rates until the end of the year.

In the Czech Republic, we expect activity data will show a further softening of IP and exports, which was envisaged with weaker PMI in July. Retail sales are likely to have remained negative in July. Headline inflation also probably remained flat in August thanks to offsetting effects of moderating food prices and fuel prices picking up.

In Brazil, GDP data should show that growth decelerated considerably in Q2. In addition, inflation data for August should reach the peak for the year at 7.2% y/y.

South Africa’s July’s manufacturing output data will be important. Recent numbers have been very weak, with June production rising by just +0.9% y/y. Aug business confidence is forecast to slip further from the 99.0 reported in July and Turkey provides Aug inflation data will be in focus; an up-tick from July’s +6.31% y/y headline-CPI print is probable.