Broadgate: Weekly Briefing 23/8
23 August 2013
Eurozone growth hits 26-month high, says PMI survey – Eurozone business activity grew at its fastest pace for 26 months in August, according to a closely-watched survey. The Markit composite purchasing managers’ index – which includes manufacturing and services – rose to 51.7 points, from 50.5 in July. A number higher than 50 indicates growth. The news boosted European stock markets, which rose in early trading, despite falls in Asia amid fears the US may scale back its stimulus programme.
Markit said the PMI for the services sector, which accounts for the bulk of economic activity, rose to 51 in August to a 24-month high, from 49.8 in July. The manufacturing sector PMI hit a 26-month high of 51.3 points, up from 50.3 in July. However, a breakdown of the figures showed that while Germany continued to expand thanks to stronger export activity, France contracted, falling to 47.9 in August from 49.1 in July.
“So far, the third quarter is shaping up to be the best since the spring of 2011,” said Chris Williamson, Markit’s chief economist. “The upturn is being led by Germany,” he said. “A big question mark still hangs over France’s ability to return to sustained growth.” And he cautioned that rising unemployment indicated there were continuing problems. “The job shedding in part reflects the need to keep costs down and remain competitive, but there is still some uncertainty about the outlook,” Mr Williamson said.
Stock markets reacted positively to the news, which followed recent data showing that the eurozone bloc had emerged from recession. The main markets in London, Frankfurt and Paris were up about 1%, shrugging off concerns about the US stimulus programme that had unnerved Asian investors.
On Wednesday, the minutes of the July meeting of the US central bank, the Federal Reserve, showed that officials were “broadly comfortable” with plans to scale back the USD 85bn (GBP 54bn) a month bond-buying programme. While the minutes did not reveal any clues about when the measure may be tapered, analysts said that they did reinforce the view that the tapering will happen. “Most analysts still expect tapering to start in September, or at the bare minimum a September announcement and implementation through October and November,'” said Stan Shamu, a market strategist at IG Markets in Melbourne.
Chinese Manufacturing Grows – Chinese manufacturing resumed expansion this month after shrinking the most in almost a year in July and output at European factories and services companies improved, a sign the global recovery is strengthening.
A preliminary purchasing managers index for China by HSBC Holdings Plc and Markit Economics rose to 50.1 from 47.7. A reading above 50 indicates expansion. Manufacturing (PMITMEZ) and services in the euro area also grew more than economists forecast in August, led by Germany.
China’s manufacturing, fuelled by domestic demand after Premier Li Keqiang rolled out measures to support growth, indicates the world’s second-biggest economy is strengthening after a two-quarter slowdown. Global central bankers meet this week in Jackson Hole, Wyoming, to discuss the global economy as the Federal Reserve considers winding down the pace of monthly stimulus, a prospect that’s already roiled financial markets.
“We expect the euro-zone economy to continue its recovery in the remainder of this year, but it will likely be a slow and uneven process,” said Martin van Vliet, an economist at ING Bank NV in Amsterdam. “The recent slowdown in some key emerging economies could be an important headwind to euro-zone export growth. In that regard, it is encouraging to see that the Chinese PMI saw a sharp rebound.”
The 2.4-point jump in the China measure was the biggest gain since August 2010, when the gauge rose 2.5 points to 51.9, according to data compiled by Bloomberg.
“Domestic demand is strong enough to support 7.5 percent growth in 2013,” said Ken Peng, senior economist at BNP Paribas SA in Beijing. “Almost all of China’s economic data since July has shown improvements and suggests a rebound is underway.”
Emerging markets hit after Fed, data lifts European shares – Emerging market currencies and shares fell on Thursday and the US dollar rose as a spike in US debt yields drove up borrowing costs globally, overwhelming the impact of buoyant economic reports from China and Europe.
However, with capital on the move back into developed markets, European shares and the euro bounced higher when the new business surveys confirmed expectations of strengthening recovery, lifting demand for banks and other financial stocks.
Driving the flight of funds were the minutes from the last U.S. Federal Reserve policy meeting, which left unchanged market expectations that the central bank would being to taper its asset-buying programme as early as next month.”It looks as if the minutes have done little to push back on market expectations for a Fed tapering,” said Ian Stannard, head of European foreign exchange strategy at Morgan Stanley. That sentiment sent the 10-year Treasury note yield to a two-year high of 2.905 percent on Thursday, and lifted the dollar against an index of the world’s major currencies by 0.25 percent.
Emerging markets, which rely heavily on cheap dollars to fund large current account deficits, were hit hard by the rise in Treasury yields. The currencies of India and Turkey hit new record lows and their stock markets and bond prices also fell. The currencies of Indonesia, Malaysia and Thailand all hit multi-year lows as well, while share markets across Asia outside Japan dropped 1.1 percent to a six-week low.
But as data from Germany showed Europe’s largest economy expanding at its fastest pace since January, coming after a similar Chinese survey signalled expansion in world’s number two economy, the euro rose and European shares gained. The Markit preliminary composite Purchasing Managers’ Index (PMI), which measures growth in both the manufacturing and services sector and covers more than two-thirds of the German economy, rose to 53.4 in August from 52.1 in July.
“It’s an increasingly buoyant-looking picture, with manufacturing seeing its best performance for a couple of years, and alongside that there’s an improving service sector, so exporters are doing well and the domestic economy is healing,” said Chris Williamson, chief economist survey compiler Markit.
The euro hit USD 1.3360 after the PMI was released, while Europe’s broad FTSE Eurofirst 300 index jumped 0.7 percent, snapping three days of losses.
Spotlight On: Frontier Markets Stealing the Limelight
As emerging markets continue to fall from grace, their less high-profile frontier peers are stealing some of the spotlight.
A recent report from Bank of America Merrill Lynch showed that while some USD 2.1 billion exited emerging market funds from January to mid-August, frontier market funds saw inflows of USD 1.5 billion in the same period.
The shift in sentiment is also reflected in equity markets in the past week. While Fed’s “taper tantrum” triggered a 3.6 percent loss in the MSCI Emerging Markets index, the MSCI Frontier Markets index gained 0.25 percent in that time.
Right now frontier is very exciting,” Mark Mobius, executive chairman of Templeton Emerging Markets Group said. “These frontier markets, particularly in Africa, are growing at a tremendous pace… this is the place to be at this stage of the game.”
The ‘frontiers’ consist of 30 typically undeveloped countries with the potential for rapid rates of economic growth, such as Bangladesh, Iraq and Mozambique.
According to Thomas Hugger, CEO and fund manager of Hong Kong based investment firm Asian Frontier Investments, the reason why frontiers haven’t suffered as much is because they are relatively less dominated by foreign capital, compared to somewhere like India. “Frontier markets, especially Asian frontier markets, are less correlated to the outside world,” said Hugger. “Foreigners have little impact in these countries. Indeed, Sri Lanka and Pakistan, for example, have even seen positive inflows over the past few weeks.”
Frontiers offer huge potential because their stock markets have lagged far behind the pace of economic growth in these countries, Hugger noted. Gross domestic product growth among all the frontier markets averaged 6.9 percent in 2012 and is forecast to grow by 7.2 percent in 2013, he said. “This has led to unbelievably low valuations for these markets, which are trading at a huge discount to stocks in the Philippines and Indonesia for example,” Hugger added.
Still, some analysts warn of the low levels of market liquidity and the high risk of corruption and violence entrenched in these frontier markets that have put risk-adverse investors off in recent years. “If things go wrong you cannot get out, this is as speculative as you can get,” said Paul Krake, founder of Hong Kong investment firm View From the Peak: Macro Strategies. Krake said investors need to weigh up the attraction of “amazing opportunities” with the kind of unprecedented risks which are common to frontier markets. “With any form of speculative investment you can have some real winners and you can have some disasters. There is corruption and violence and there’s all this stuff you have to take into account,” he said.
Hugger acknowledged that the risks were higher but said investors could easily mitigate these risks by spreading their investments across different frontier markets and different sectors within each country.
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