Friday, 22 June 2012

From Beijing to Philadelphia – No Joy Anywhere

More evidence that a globally synchronized downturn is underway was made available on Thursday. It began with the HSBC flash manufacturing PMI estimate for China (pdf) which declined to a seven month low, including the fastest fall in export orders since March of 2009 (not a particularly happy time as we recall). It should be noted here that the HSBC PMI estimate puts greater weight on the private sector then the official PMI data. We therefore believe it is actually a more relevant indicator than the official PMI.

Next a set of Markit European flash PMI data was released – for the euro zone as a whole (pdf) as well as for Germany (pdf). The euro area flash manufacturing PMI fell to a 37 month low of 44.4, Germany's manufacturing PMI to a 36 month low of 44.7. Germany has now almost fully caught up with the PMI indicators elsewhere in the euro area, with export business – one of Germany's traditional strengths – suffering a steep and accelerating decline.

The state of Germany's export business is probably an excellent indicator for the global economy. This is so because in recent years Germany's exports to regions outside of the euro area have grown especially strongly.

These PMI data releases rounded off the worst quarter in three years for the euro area.

Euro area flash PMI and GDP – say hello to the worst contraction in three years - click chart for better resolution.

More bleak data were released when the markets opened in the US. New homes sales decline by 1.5% and initial claims at 387,000 came in higher than expected, but the number was not a real shocker. That came later when the Philly Fed business survey (pdf) plunged well into territory normally associated with recessions at minus 16.6 – down from minus 5.5 last month and against an expected 0.0.
After the market close, Moody's downgraded a number of US and European banks (and even one Canadian bank) with 'global operations', with several of the downgrades also worse than expected. However, the markets knew that these downgrades were coming and discounted them in advance (with a bit of a thud as it were). So it remains to be seen how these stocks will trade now that the downgrades are out of the way. Details of the Moody's downgrades can be seen at Alphaville.

The Philly Fed Business Outlook Survey – the current activity measure is in territory normally associated with beginning recessions – click chart for better resolution.

On Wednesday, ATA's Truck Tonnage Index was released, revealing a further weakening in May.

Financial Markets in Post-Twist Paroxysm
We recently briefly commented on the S&P 500 index, noting that the wave count of the initial decline suggested a likely primary trend change from up to down. Then we showed a Fibonacci grid with likely retracement levels for the rebound that was still underway earlier this week. At the close on Friday last week, the SPX had reached the 50% retracement level.
On Tuesday it reached the 61.8% retracement level, and that level has provided the resistance from whence it has now turned down. This level is also where lateral resistance from the short term low that was established in April resides. It is possible that this lower high will hold, but this is of course not yet certain. The question is though: why should the market go up?

SPX with Fibonacci retracement levels of the initial decline revisited: the 61.8% level has proven to be resistance so far - click chart for better resolution. 

As is often the case when stocks weaken, the US dollar had a very strong day, and gold had in turn a very bad day – however, this does not alter gold's longer term picture (i.e. it remains in a lengthy triangular consolidation).

A bad hair day for gold, likely mostly in reaction to the strengthening US dollar - click chart for better resolution.

Our guess at this point would be that in the event that stock market weakness persists – and given there is no 'QE' and the economic backdrop is worsening, it may well do so – then the Fed will prove ready and willing to throw more money from thin air at the problem fairly soon.
As mentioned yesterday, the Fed is mainly held back by the fact that it has no good excuse just yet. If such an excuse presents itself, we expect it to act.

Crude oil's decline continued as well – it is now approaching support from last year's interim lows. The consistent weakness in crude oil is another sign that the global economy is weakening - click chart for better resolution.

Our proprietary index of 5 year CDS on the senior debt of European banks versus 5 year CDS on the senior debt of major US banks. At the moment the market clearly likes US banks and investment banks better - click chart for better resolution.

We argued at the very beginning of June that a synchronized global contraction was likely and that 'decoupling' theories were therefore unlikely to work out.
The economic data releases received since then appear to bear this idea out. The fact that it oftenappears as though a decoupling may be possible is due to leads and lags – stock market tops are usually also presaged by divergences between stock markets in different regions of the world – they rarely peak at exactly the same time. The same goes for economic activity.

Chatrs by: Bloombrg, StockCharts, Markit;  ATA, Philadelphia Fed

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