PMI Boosts Abound
Risk was back in favour on Wednesday as broadly positive manufacturing prints globally further consolidated expectations that fears over a global economic slowdown are overdone. Chinese and Australian PMI were the bright spots, while most European releases surprised to the upside. However, we note that in Europe these ‘surprises’ are still coming off very weak levels, and in Germany’s case output is still contracting. The austerity measures across Europe are only in their early stages of implementation, so with the pain yet to come we would not be carried away by these numbers. The market is still choosing to be ‘risk on’ because of positioning concerns, though we do acknowledge that a general soft landing globally will give governments more time for fiscal adjustments. At present, growth forecasts remain relatively conservative, but there is still some upside risk to our expectations of a recession in Europe in particular. On the other hand, pricing in early normalisation or at least policy stability is also too optimistic a view. The continued provision of liquidity by global central banks is a clear sign that unconventional stimulus is needed to anchor growth expectations. As a result, most flows are still heading to higher-yielding emerging markets but the funding mix has shifted to include the euro and the dollar. Meanwhile the market will likely stay on intervention watch for JPY and CHF, as some critical levels are approaching. The decoupling of JPY and CHF with the other majors in a risk-on environment clearly shows the market is positioned for a policy response. Yet the trigger for challenges to these levels remains to be seen. There is still no word out of Greece on debt swap negotiations and like lawmakers across the Eurozone, market patience may be starting to run out. It is likely that the discussion has now shifted to how the public sector can participate in the debt restructuring, and allow a comprehensive deal to be announced to markets, which could encourage a stronger private participation number if there is no seniority loss. Later today US macro figures are out. The manufacturing ISM release wills seek to continue the good run of data today, while the ADP survey is expected to dip – consistent with market expectations for the trend in non-farm payrolls.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank