The new normal? Europe starts to out-perform China …

The biggest news today is that Europe is finally showing signs of growth. Its PMI readings for July saw the manufacturing sector rise above the crucial 50 mark for the first time in two years, the composite survey also rose above 50, rising to its highest level since January 2012. It’s been a long time coming, but could the Eurozone’s famed second half recovery actually be taking shape?

Bonnes nouvelles pour le France

Perhaps the most interesting development in the Eurozone is the pick-up in France. While it’s good news that there are signs of stabilisation in Spain and even Italy of late, France has been the weakest link for some time. At the start of this year its manufacturing PMI dipped to the low 40’s, while the service sector surveys were lingering around the lowest levels since 2009 only a few months ago. Now it looks like France’s private sector is starting to experience a meaningful turn around. Business confidence rose to its highest level since early 2012 in July, while the production outlook indicator recovered further in July and is back at levels last seen in May 2012. This is important, France is the second largest economy in the Eurozone, there can be no recovery in the currency bloc without France.

Germany, the largest economy in the currency bloc, also picked up strongly in July, and both the service and manufacturing sectors are back in expansion territory above 50.00. However, Germany has not been as badly effected as France in recent months, so good news in Germany is not the headline grabber right now.

The Eurozone showing signs of turning a corner

It’s been a good week for the Eurozone, consumer confidence posted another solid gain in July, following on from a good June number. Expectations about the economy, labour market and future finances are likely to have improved in July. In recent months the largest gains in consumer confidence were seen in the periphery, although they remain at low levels and are likely to stay there for some time as unemployment continues to rise. The final releases are announced next week, it will be interesting to see how France performed and if Spain and Italy can continue their recoveries.

Overall, we have seen a big improvement in business surveys, output data and household spending of late, Italian retail sales rose 0.1% in May, beating expectations. Although the bar remains low, the annual rate of sales also recovered to -1.1% from -2.9% in April.

Europe leaves China in its wake

Perhaps the biggest news of the day is that Europe is out-performing China. Its HSBC flash manufacturing PMI report fell further to 47.7 from 48.2 in June, adding to the weak economic data coming out of the Asian powerhouse. The latest Bloomberg monthly survey for China found that market expectations are for GDP in Q3 have been revised lower to 7.5% from 7.7% previously. This could be revised down even further if the data continues to deteriorate in July. The Chinese premier said that growth must stay above 7%, which is lower than the official target of 7.5% for 2013. If we see more disappointing data this quarter then expect some further official action to try and prop up the economy. For now, though, we expect Beijing to be in wait-and-see mode.

From an FX perspective, the EUR looks stable above 1.32, however attempts to make traction above 1.3250 have failed so far. This may be because a head and shoulder pattern is forming, which may see 1.3250 resistance hold, causing a sell off back to the 1.28 level in the medium-term. I’m not a big fan of these patterns, so I am waiting to see if we get more traction on the upside. Personally I think EURCHF upside could be easier after this cross rose above its 50-day sma at 1.2375 earlier today.

RBA meeting very unclear after CPI

The Aussie is still the weakest performer in the European session. It was very volatile during the Asian session after Q2 Australian CPI was released, which showed mixed price pressures in the second quarter. The trimmed mean reading fell to 2.2% from 2.3%, while the weighted median reading rose to 2.6% from 2.5%. This leaves the outlook for the RBA policy decision in August unclear, although we tend to think the bank may remain on hold. However, this was not enough to stop an Aussie sell off, which crumbled after the weak China PMI reading. This cross is still trading in a range and we think it could stay range-bound between 0.9150 (the Tenkan line on the cloud) and 0.9280 (the Kijun line on the cloud).

Source: Forex.com

24.07.2013