Good morning

Yesterday the markets confirmed two of our intuitions – the good old days when bad news was good news for European markets have passed and the growth gap between the US and Europe continues to widen. To start with Europe, yesterday we had the Manufacturing and Services PMI data coming out, two indices that attempt to gauge the momentum in these sectors, with readings above 50 indicative of expansion. At the Eurozone level the figures were 50.4 and 51.3 respectively, marking an increase from the previous month and falling short of expectations. What is more, the German data was even more disappointing, with the Manufacturing PMI reported to stand at 50 whereas the market was expecting it show a marginal decline to 51.5; to add to the uneasiness, the figures for October were revised downwards. Later in the day it was also reported that the European consumer remains negative about the future outlook as the confidence indicator came out negative for another month and, in contrasts to the consensus forecast, experienced a decline. Against this backdrop, European stock markets and high yield bonds lost ground; the sovereign bonds however had a positive day which would suggest that the weak data did boost expectations for QE. Perhaps, ECB President Draghi will provide us with more insight today as he is due to deliver a speech in Frankfurt.

In marked contrast to Europe, the US data generally surprised on the upside. The Philly Fed Manufacturing Index surged to 40.8 from 20.7 although the market participants expected a slight decline. A similar surprise came from the existing home sales which posted an unexpected increase. Meanwhile, the inflation data showed that the lower oil prices and the weaker outlook abroad did not have a material effect on the US prices which were flat (on a monthly basis) even as the analysts were foreseeing a 0.1% decline. Perhaps more important is that this data came out just hours after the Fed minutes spoke about the need of monitoring inflation expectations suggesting some downside risks. This did not prevent US equities from advancing towards new highs, as the strengthening growth outlook overshadowed concerns around the timing of the Fed tightening; it could however be that the stronger inflation print was somewhat offset by the below expectations weekly unemployment claims.

The Asian markets found support in the US data as well as an ease in liquidity constraints ahead of a flurry of new listings next week. More specifically, the Chinese Central Bank (PBOC) reportedly plans to offer 50 billion yuan, to ease the functioning of the local financial markets which will have to contend to seven IPOs on Monday. Relatedly, we note that Alibaba yesterday placed a USD8 billion bond, marking the largest USD bond offering by an Asian issuer.

Looking ahead, today we do not expect any major data and Draghi’s speech appears to be the only major event on the economic scene. Thus, markets will likely focus on digesting yesterday’s data.

Have a nice day