PMI Pushed Europe And Euro Up, But Can This Last

European stock markets are trading higher today by adding further gains on top of yesterday’s gain. Markets have gathered their momentum after another record high made by S&P500 on Wall Street however the final close was lower for most of the indices. The string of hitting a record high on Wall Street is mainly based on better than expected earning’s results.

Markets are apparently even ignoring the weak economic data which was witness yesterday when the Richmond Fed came much softer than anticipated. But how much truth and strength bulls have could be determined if the new Homes Sales data does come at a weaker side and the markets still shrug off this news and continue on their path to record another record high. The Fed’s tapering concern is becoming less fear for the markets, as the corporate earnings keep on beating the expectations which confirms that the recovery is strong in the US.

Having said that we are in a situation where a bad news is actually good news for the market because let’s not forget that Fed’s tapering decision is based on the incoming economic data. Therefore, if the incoming economic data does show a weakness, the probability of the Central Bank to initiate the tapering could go down.
Back in Europe, investors who were impressed with Beijing’s decision in which they announced that China will fine tune their policies to boost the economic growth are more optimistic about this idea after the economic data- HSBC Manufacturing PMI data came at 11 month low with the final reading of 47.7 while the expectations were for 48.6. The optimism is helping the indices in Europe which are trading up with the IBEX 35 nearly up 0.71% so far today.

The French Flash manufacturing PMI data exceeded the expectations with the final reading of 49.8 while the forecast was for 48.9. The final reading is much influenced due to an improving business confidence in the country. The bank of France also released a bullish forecast for the country’s GDP for the Q2 and the country’s finance minister also confirmed on the radio yesterday by confirming that the recession has finally ended in the country for two painful years of stagnation.

The German Flash Manufacturing PMI data also came at a much better level by threshing the expectations with the final reading of 50.3 while the forecast was 49.3. The data showed that the engine of the Europe, Germany has picked up its pace and the manufacturing sector has started performing extremely well once again. The news pushed the DAX index towards the high of the day. This was also good news for the euro which also rallied towards the high of the session by pushing the dollar lower.

However, the most important thing to think about is, if these session highs can last for any longer because lets go back to our argument of bad news is a good news for the market and vice versa. If Germany which is the biggest economy of the world starts to improve at this pace where do we stand with the ECB’s decision of the bond purchasing program and keeping the interest rates to their ultra-low level? What if Mr. Draghi starts thinking like Bernanke and if he does can this rally last!

Currencies
The Euro is trending up against the dollar while the JPY and the CAD reversing their trend to the upside against the dollar. However, the AUD and NZD have revered their trend to the downside against the dollar

DISCLOSURE & DISCLAIMER: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.

by Naeem Aslam