Europe slips further behind

The economic signals from Europe at the start of a new quarter did not bode well. The final reading of manufacturing PMI for March confirmed that the currency bloc is in deep trouble. The index fell to 47.7, after an incredibly weak reading for France, suggesting that after the second largest economy in the currency bloc escaped recession in Q4 2011 it may be harder to do so in the first three months of 2012.

Even Germany didn’t escape the contraction and its PMI figure, although it was revised slightly higher, was still a mere 48.4 from 48.1. Germany may avoid a recession however, since the IFO and ZEW measures of business and economic confidence have diverged from the PMI and continued to trend higher this quarter. Interestingly the IFO has a closer relationship with German GDP compared to PMI data, suggesting that Europe’s largest economy is stronger than the PMI reading suggests.

UK outperformer

Elsewhere, the big surprise of the morning was UK PMI. The manufacturing index rose to 52.1 from an upwardly revised 51.5 in February, the strongest reading since April 2011.However, this pocket of strength follows weak housing and retail sales data, also the services sector is a more important gauge of economic strength in the UK and we don’t get the March data until Wednesday. Markets expect a slight drop to 53.4 from 53.8. However any surprise to the upside may cause some expectation that the UK economy could have expanded last quarter and thus may narrowly avoid a recession.

This has helped the pound to remain comfortably above 1.60 today after finding good support at 1.5980 earlier. Some people are amazed at the pound’s strength in recent sessions and its ability to surge above 1.60 even though the economic fundamentals are fairly poor for the UK and today’s economic surprise seems like an anomaly. It doesn’t seem like the pound is ready to fall yet, either. It’s managed to avoid some of the gyrations plaguing the euro this morning and we need a bigger shake-out above 1.6040 to dent cable’s momentum. The next key levels to the upside include 1.6060 and then 1.6160.

Greece to default this week?

Weekend developments set a positive tone to the markets when London got in, however that had dipped slightly and European stocks are in slight negative territory. This could be down to reports that Greece may default on its bonds issues in foreign law. Athens can’t enforce Cac’s on these bonds but has been given the go-ahead by the European authorities to stop payments if bond holders don’t agree to a haircut. The deadline for them to sign up is the 4th April.

The positive surprise in China’s PMI data that saw the index rise to 53.1 from 51.0 in February helped to ease some fears of a hard landing in China. However, it is worth noting that Chinese PMI is seasonally strong in March as this is when new government-sponsored projects tend to get started for the year. Also, the reaction in China’s stock market was fairly muted, perhaps because a stronger reading makes more monetary accommodation seem less likely. Added to that the Vice-President said that keeping prices stable remains a key priority, which may doesn’t suggest that authorities in Beijing will be loosening bank lending or cutting interest rates any time soon.

The muted reaction from the Aussie is particularly notable today. It usually has a high positive correlation with Chinese economic data releases, and in the past would rally strongly if Chinese PMI data was stronger than expected. However, the RBA meeting tomorrow is keeping the reaction in the Aussie fairly muted. After falling below key support at 1.04 (the 100 and 200-day moving averages) the index hasn’t been able to sustain gains above that important level. This opens the way to another leg lower to below 1.03. However, the timing will be dependent on the RBA meeting tomorrow. We agree with consensus that the RBA will remain on hold at 4.25%, although the chances of a rate cut have been growing in recent weeks as Australian economic data has lost momentum. Even if the Bank remains on hold, the accompanying statement is likely to be dovish, which could weaken sentiment towards the Aussie. We expect the bulk of the move to happen before the London open tomorrow as the RBA meets at 0530 BST.

A pivotal week for the markets

Unemployment data also added to the negative economic signals coming from the currency bloc, in February the unemployment rate rose to 10.8% from 10.7% at the start of the year. This is extremely negative news and apart from Germany the employment picture is looking extremely bleak which could aggravate growth concerns in the euro-area.

There is a packed economic calendar this week with central bank meetings in Europe, the UK and Australia along with servicer sector PMI’s, payrolls in the US and Fed minutes. The markets will be looking for any signs that 1, the ECB will offer more policy support after the LTRO-effect on peripheral bond yields showed signs of wearing off in recent weeks, 2, if employment data in the US misses estimates then expectations of more policy easing from the Federal Reserve will grow.

So it could be a pivotal week and the outcome of the central bank meetings and economic reports will determine the trends that prevail over the second quarter.

Источник: Forex.com

02.04.2012