Market Commentary: PMI report suggests Eurozone could avoid sliding back into recession

As the build-up to 3 key events intensifies, namely this weekend’s announcement of the AQR stress tests on European Banks, as well as the forthcoming ECB and US Federal Reserve interest rate setting meetings, daily earnings releases and economic data remain the key focus of intraday trading and continue to drive market sentiment.

This morning we’ve had a flurry of key data prints coming out of Europe, namely Eurozone Manufacturing PMI, which came above expectations, signalling, or rather showing signs that there is light at the end of a tunnel for a possible Eurozone economy recovery.

This has sent the large part of European equity indices in positive territory as the publishing of this report.

The PMI report highlighted an increase to 50.7 from 50.3, quite positive considering analysts were forecasting a decline to 49.9. These numbers suggest that the Eurozone could well avoid sliding back into recession, but it is still early days to write off this scenario, as with growth levels stubbornly low, companies are increasingly reducing headcount and margins in an attempt to revive their fortunes and protect the long-term prospects of their respective companies.

ECB’s Mario Draghi has in fact raised his concerns of a deflationary spiral of falling prices, as households postponing their spending plans.

To add further impetus to the positivity this morning was a report indicating that Chinese factory activity unexpectedly increased, as markets eagerly await this afternoon’s data from the U.S. on manufacturing and jobless claims. Meanwhile, General Motors Co., Caterpillar Inc., Amazon.com Inc. and Microsoft Corp. are among companies reporting today.

On the flipside, we have seen mixed economic data in the UK as retail sales fell more than economists forecast in September, mainly due to the fact that the warm weather propelled investors in delaying their winter clothes purchases, sending UK lowers this morning.

While unemployment in the UK has declined, weak wage growth has been limiting households’ spending power, as U.K. consumer confidence weakened last month and households’ outlook for the economy also deteriorated on the back of fears of a persistently weaker Eurozone economy and the possible contagion effects it could have on the UK.

Credit Suisse Group AG, Switzerland’s second largest bank, reported an increase in Q3 profit earlier on this morning on the back of a marked increase in revenue, as the group’s net income increased to CHF1.03 billion from CHF454 million only a year ago.

CEO Dougan states that earnings reflected “robust client activity” across businesses, as Credit Suisse plans to focus on wealth management, which is expected to be expanded through smaller acquisitions and organic growth.

As we await the outcome of this weekend’s AQR results, speculation remains rife on which banks could actually be short of the minimum capital threshold as stipulated by the ECB. Reports indicate that up to 11 banks could fail this Asset Quality Review, with Banca Monte dei Paschi di Siena SpA and Banca Carige SpA being possible two candidates as the banks are unlikely to have raised sufficient capital this year to fill the shortfall and will probably need to raise the necessary cash to remain alive.

Nevertheless, the results are not expected to create a systemic risk that may damage markets. The ECB’s stress test is the second part of the central bank’s Comprehensive Assessment of bank balance sheets with evaluations in a so-called baseline scenario and in an adverse scenario. While other Italian lenders may also have insufficient capital under stress tests, it appears that they have, in the interim already raised sufficient funds to make up for this potential shortfall.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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