The euro made a marginal new high in early
Asia, but participants rightly drew cautious ahead of the flash eurozone PMI. The flash PMI was
softer than expected, and although the composite fell to six monthly lows, it
is more a reflection of how steady it has been at elevated levels. At the
same time, it is consistent with one of our contentions; namely that the
economic momentum that was so apparent in the first half is no longer
accelerating.
The euro was
sold for half a cent before finding a solid bid near $1.1630.
The pre-weekend low was about $1.1620. Recall that initially in response
to the ECB meeting, the euro initially fell to $1.1480 on July 20 before
recovering smartly to almost $1.1680. To keep today’s pullback in
perspective, note that it managed to simply push the euro back below the upper
Bollinger Band (~$1.1650).
The eurozone
composite flash PMI eased to 55.8 from 56.3. Economists expected a
softer number, but the slippage was more than expected. It was a function
of the manufacturing sector. The manufacturing PMI eased to 56.8 from
57.4, while the services were unchanged at 55.4. Of note on the aggregate
level, manufacturing costs appear to have begun slowing, while new orders and
employment remains firm.
In Germany, both service and manufacturing
readings fell and by more than expected. The manufacturing PMI
slipped to 58.3 from 59.6, while the services PMI eased to 53.5 from
54.0. The composite PMI fell to 55.1 from 56.4, which is the lowest since
January. The manufacturing reading is three-month low.
French manufacturing fared better than in
Germany, rising to 55.4 from 54.8. This
is a new six-year high. Services disappointed, at 55.9 from 56.9.
That puts the composite at 55.7, which is also a six-month low. The
composite in June stood at 56.6.
Earlier, Japan reported that its preliminary
manufacturing PMI also ticked down in July to 52.2 from 52.4.
Nevertheless, the yen remains firm. It is extending its gains against the
dollar for the fifth consecutive session. In Asia, the dollar was sold through the JPY111 area, which
corresponds to 1 61.8% retracement of the dollar’s gains since the Fed hiked
last month. European dealers took the dollar to almost JPY110.60.
Only a move now above JPY111.20 would deter the market from pushing the dollar
closer to JPY110, where a more important psychological test would be in
store.
Softer global bond yields may be helping
bolster the yen. European core 10-year yields are off nearly two
basis points, while periphery yields are off 2-4 bp, though Spanish bonds are
underperforming. US 10-year yields are off
a single basis point in the European morning.
Asian equities extended their rally, while
European shares are heavier for the third consecutive session. The
MSCI Asia Pacific Index extended its rally to the 11th session with its minor
0.15% gain. Japan and Australian markets kept the index in check,
while Chinese shares advanced. The Shanghai Composite rose 0.4% and has
risen in four of the last five sessions, and over the five sessions, it is among the strongest in the
region.
European equity markets are being weighed down
by consumer discretionary, energy and utilities. All the major sectors
are lower, though industrials and financials are faring best. Many asset managers have been attracted to European
stocks on valuation grounds, and have also liked the tailwind offered by the
euro. However, as we have noted US shares have outperformed since
the start of May, and today’s decline has brought the Dow Jones Stoxx 600 to
its lowest level since late April.
Recall that in response to Macron’s first
round victory in France in late April, equity markets gapped higher.
The DAX has entered the gap at the end of last week and continued to close it
today, but it extends to about 12091,
another 50 points or so below. France’s CAC has spent the better
part of the past six weeks in the gap, which extends to 5081.6.
This is
a big week for the US. The first part
of the week may be dominated by political issues. President
Trumps’ son-in-law and adviser Kushner is
to testify before the Senate Intelligence Committee. Several meetings
with Russians apparently were not included
in initial declarations. An early campaign manager (Manafort) will
testify to the same committee later in the week. Meanwhile, the Senate’s
leadership may force a procedural vote on repealing the Affordable Care Act.
Wednesday is the conclusion of the FOMC meeting,
and at the end of the week, the US reports its initial estimate of Q2 GDP.
Also, the Q2 earnings
season begins in earnest with nearly 20% of the S&P 500 companies
reporting.