PMIs Hit Risk Hard
Risk was hit repeatedly through overnight sessions as successively weak PMI numbers globally have now again led to investors questioning whether the early 2012 bounce in growth was simply not sustainable. Chinese and German PMI figures both showed significant contraction in their key sectors, while Japanese trade numbers also suggested global demand, ex-US, was looking very weak. During the Asia session, AUDUSD dropped 100 pips after China’s flash PMI estimate for March came in well below February’s final print (48.1 versus previous 49.6). The PMI also added to the kiwi’s troubles, compounding the sell-off that began earlier after a very weak New Zealand GDP report. Japan’s trade balance unexpectedly climbed back into surplus territory in February (on a non-seasonally adjusted basis) but only due to strong exports to the US. On the other hand, exports to China and the European Union fell by 14% and 10.7% respectively. The bigger question at this point, though, is whether the US can still maintain its current momentum while growth and growth drivers in other economies are really starting to show signs of strain, while room to ease or provide stimulus in the current environment is weak: on the conventional side, inflation expectations are high while benchmark rates are already at effectively zero levels. On the fiscal side, balance sheets in the developed world are strained. The Eurozone figures released overnight showed French and German manufacturing PMIs come in at 47.6 and 48.1, respectively, significantly weaker than expectations as markets had looked for prints above 50 for both countries. Weaker global demand is a problem, but once again the numbers may force the Eurozone leadership to rethink their current policy framework with austerity as the only driver, without any provisions for growth. The ECB may yet be forced to reconsider their policy path, and we do expect ECB Governing Council members to scale back their ‘normalisation’ rhetoric for now. Overnight EURUSD traded 1.3135-1.3254 and USDJPY 82.77-83.46. Ahead today, jobless claims numbers are due in the US and Fed Chairman Bernanke will speak at 12:45 ET.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank