It’s been a tough morning for European markets on Thursday and this is likely to carry into the US session as weaker PMI readings from China and the eurozone and disappointing UK retail sales weigh on investor sentiment.
Markets were initially happy to shake off the decline in the HSBC manufacturing PMI from China because despite falling to a one year low and deeper into contraction territory, the People’s Bank of China remains very active and this will only encourage it to cut interest rates and the reserve requirement ration further in the coming months. China is of course a concern and a threat to the global economy but I think people have faith in the PBOC to prop it up and the more it props it up, the happier investors are because this means more liquidity.
While the ECB is also considered to be a very active central bank, it is going to take a far more considered approach than the PBOC as its interest rates are already in negative territory and it’s buying €60 billion of debt every month. I see little chance of the ECB loosening monetary policy again this year but the same can certainly not be said for the PBOC. With that in mind, poor data in the eurozone is a concern and is bad news for the markets.
We were just starting to get a little more optimistic about the eurozone following months of improving PMI readings on the back of a weaker euro that seemed likely to stimulate the economy. Unfortunately, the ongoing negotiations between Greece and its creditors have significantly increased the odds of a Greek default and the uncertainty that this creates appears to be denting the fragile confidence that has arisen this year. The good thing is I do expect a deal will be reached which should be followed by a rebound in the PMI readings.
UK retail sales produced another disappointment this morning, surprisingly falling by 0.5%, while core sales only rose by 0.2%. The only upside here was the decline in retail sales was largely driven by a decline in fuel sales which isn’t necessarily a bad thing. Hopefully it just means consumers have a little extra cash in their pockets heading into the summer.
On a more positive note, public sector net borrowing was pretty much in line with expectations and February’s number was revised lower meaning borrowing in the last fiscal year fell by more than £10 billion. I’m sure the Conservatives will welcome this news only a couple of weeks before an election in which the economy and deficit cutting are two of the biggest issues.
With plenty of data being released from the US today and a number of massive companies also reporting on the first quarter, it should be a very eventful trading session. Jobless claims, new home sales and the preliminary manufacturing PMI for April will all be released around the open on Wall Street. Earnings from 55 S&P 500 companies will also be released including a wide range of companies such as Amazon, Caterpillar, Procter & Gamble and General Motors. Needless to say, we should have a very good idea about what kind of earnings season this is going to be after today, including the impact of the strong dollar on those multi-nationals.
The S&P is expected to open 6 points lower, the Dow 61 points lower and the Nasdaq 17 points lower.
For a look at all of today’s economic events, check out our economic calendar.