Capital Markets: "Disappointing Flash PMI Weighs on Euro"

From Marc to Market:

Overview: The US dollar is firmer against the major currencies and most emerging market currencies. While the seemingly fragile equity markets are still the center of investors' attention, the weakness of the eurozone flash PMI is disconcerting and has sent the euro closer to $1.14. China's officials continue to unveil initiatives to minimize the disruption of the equity and debt markets while seemingly adding to moral hazard risks. It was sufficient to stabilize the Shanghai Composite, but smaller cap equities in Shenzhen eased. European bourses are mostly higher, with the Dow Jones Stoxx 600 trying to break the five-day losing spell. The S&P 500, gapped lower yesterday, and rallied to close the gap late in the session, but still extended its losing streak to five sessions. It is called about 1% low to retest the 2700 area that was taken out intraday yesterday. Fragile equities, the 3-4% drop prices yesterday, with some follow-through selling today, and some disappointing data, is helping push down bond yields across the board. Yields in Asia-Pacific were off one-two basis points, while peripheral European bond yields are off two-four basis points. Core European yields are off slightly, while the US 10-year yield is easing back toward yesterday's lows (~3.11%).

Asia-Pacific: Instead of announcing a large comprehensive package to deal with the financial instability, Chinese officials are bleeding in new initiatives on a daily basis. The thrust is to minimize the fallout from the widespread use of equity as collateral, which is the immediate issue. At the same time, other measures, like the tax cuts, are meant to support the economy more broadly. There is concern that trade tensions are disrupting economies, but the evidence is less clear-cut. Look at the flash PMIs for Japan and Australia. Japan's manufacturing PMI rose to 53.1 from 52.5. Australia's manufacturing PMI also rose (54.3 vs. 54), however, what dragged the composite lower (51.2 from 52.5) was the unexpected weakness in the service PMI (50.8 vs. 52.2). Weakness in services is seen as a reflection of domestic conditions, while the manufacturing PMI is understood as an indication of the export sector.

EMU: The Bundesbank warned that the German economy might have stagnated in Q3, but it sound upbeat that the expansion would resume in Q4. Today's flash PMI suggests the BBK may have been optimistic. The flash composite, reflecting a decline in manufacturing (52.3 vs. 53.7) and services (53.6 vs. 55.9) fell to 52.7 from 55.0. It is lower than any forecast in the Bloomberg survey and represents a new cyclical low (time series is only three-years-old). France did marginally better. Its manufacturing PMI eased (51.2 from 52.5), but the service sector unexpectedly improved (55.6 from 54.8). This was sufficient to lift France's composite reading to 54.3 from 54.0. When it comes to aggregate figures, the manufacturing decline is understandable, but the service decline was a little larger than the decrease in the manufacturing PMI, and the composite fell to 52.3 from 53.7. It appears to be building into the estimate more weakness in the periphery when final estimates are reported next week.

European Central Banks: The flash PMI makes a poor backdrop for the conclusion of the ECB meeting tomorrow and Draghi's press conference. The challenge for Draghi is that without updated staff forecasts (due in December), he will likely only be able to deviate slightly from his optimism last month that was pinned largely on the improvement of the labor market....

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