Euro Area Slightly Less Firmly Lodged in Thomas Crapper's Invention, China Has New Broom Bounce

It is that time of the month when Markit and its assorted collaborators grace us with PMI updates. As has been the case for most of this year, the euro area remains a litany of woes, and in the so-called 'core' it is once again France that   seems to have performed the worst, as new orders have gone over the cliff.

By contrast, Germany at least boasted fairly robust services data, which follow on the heels of a better than expected ZEW survey. It must be kept in mind here that Germany is one of those places in the world where interest rates have become near extinct, due to the combination of the ECB lowering its administered rates as close to zero as it dared and 'safe haven' flows doing in the yields on German government debt (which, as it were is slightly bizarre considering the debt mountain under which the country groans and its dire demographic outlook; but then again, Germany no doubt has its qualities as well).

When the price of capital is at the pretend level of 'near zero' due to numerous central bank interventions, then economic activity becomes automatically suspect. Entrepreneurs are robbed of the possibility to engage in proper economic calculation; the entire system of prices is revolutionized and disrupted. It is no longer possible to tell which investments truly make sense. In Germany, we see incipient signs of a real estate bubble forming, as for instance the so-called 'Plattenbauten' of the communist era in the country's East have become 'hot items' among investors, seeing their prices rise sharply. As of yet, there is obviously still a lot of caution among businessmen overall. The crisis in the rest of the euro area keeps people on their toes, muting the response to the incentive emanating from artificially lowered rates. However, this is merely a concrete historical circumstance of the moment; it does not alter what was said above regarding the effects of the ECB's policies on the economy, although it may affect leads and lags.

In any event, the better performance seen in Germany's PMI has affected the euro area data as a whole (it will be of little consolation to people in the periphery).

According to Markit's chief economist:

“The eurozone downturn showed further signs of  easing in December, adding to hopes that the  outlook for next year is brightening. It looks like the  downturn reached its fiercest back in October, since  when the PMI has turned up steadily by no means spectacularly. 

“The survey is still consistent with euro area GDP  falling for the third successive quarter and, as the  official data lag the PMI, the downturn is likely to  have steepened compared with the 0.1% decline  seen in the third quarter. However, a return to  growth is looking like an increasing possibility in the  first half of next year, barring any surprises, if the  recent improvements in the survey data can be  sustained.  

“The turnaround is being led by Germany, for which  the PMI has already returned to positive territory.  However, the rates of decline in France and the rest  of the region remain worryingly severe.”


Here are the the links to the reports (all in pdf format):

the euro area flash PMI, Germany's flash PMI and to France's flash PMI


China Expands Slightly

he HSBC China flash manufacturing PMI came in at a slightly expansionary 50.9, which is actually a 14 month high. It is difficult to tell from afar to what extent various measures by the central government have influenced the data, but given the recent leadership handover, there is at least some reason to suspect that a few steps were taken to boost activity.

We are mainly interested in the possibility of the stock market (inscrutable as it is) to produce a bounce worth playing. We have previously pointed to the growing gap between the FXI ETF and the $SSEC index in Shanghai, which essentially reflects two things: the growing gap between H and A shares (foreign and domestically traded Chinese shares) and the stronger yuan.

It is however a good bet that such gap will close over time; similarly, the growing performance gap between the Hong Kong and Shanghai markets is likely to close.



H-shares versus A-shares

Shanghai vs. Hong Kong – a growing gap – via Sovereign Society – click for better resolution.



After making a marginal new low in early December, the Shanghai stock market has actually taken off like a scalded cat lately, finally providing a bit of vindication for our slightly early technical call (although FXI actually did rally well ahead of it, so we felt slightly less foolish in November than we might have otherwise).

How far will this rally go? As always,we have no idea, but we note that the market has finally broken through resistance. The next significant resistance level is provided by the April low at 2350 – but that is only 100 points away, a distance the market just covered in a single trading day.




Shanghai takes off – via BigCharts – click for better resolution.



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