European manufacturing bouncing back

After some choppy price action last week following some key economic events in the US, equities remain in consolidation mode this week.

Source: Bloomberg

We have managed to get a better indication of how manufacturing activity is progressing in various regions, with releases in Europe, China, Japan and the US setting the tone. The data has shown manufacturing activity is picking up in Europe and the US, while Asian economies are showing signs of strain on the manufacturing front.

Europe has been particularly interesting as Germany tries to pull the region out of a slump but some analysts remain concerned that the two-speed economy will not be easily rectified. Manufacturing activity in Europe has bounced back to May 2011 levels and, importantly, has been fairly consistent in recent months.

Should this trend continue, it’ll give a nice tailwind to GDP growth. Given FX moves have played a key role in how equities have performed, perhaps the fact we’ve hardly seen any big moves in key currency pairs recently has contributed to the lacklustre price action we are currently seeing.

It’s almost as if the USD is a sleeping giant at the moment and we probably won’t be seeing much volatility in equities either until it awakes.

Greenback a sleeping giant

The greenback finally managed to stabilise, helped by a bounce in US inflation. There has been a suggestion this is a reflection of the reversal in oil prices but, given other developed economies are not experiencing the same effect, then it’s still a good indication the US economy is improving.

In sharp contrast, the UK saw its CPI drop to zero and this put a dampener on the sterling. GBP/USD was within striking distance of the $1.5000 mark but the weak inflation read was enough to cause some fresh weakness for the pair.

It’s also quite interesting to see just how long the greenback can remain at bay before resuming its run. The bottom line is there is still a significant amount of divergence between the US and the rest of the world and it’s just a matter of time before US data reignites the greenback.

On the Fed front, James Bullard said zero rates are no longer appropriate and is calling for a hike in June. February durable goods orders will be driving USD sentiment today. Fed member Charles Evans speaks and we also have crude oil inventories.

Banks remain resilient

The AUD has remained steady with today’s RBA semi-annual financial stability report not bringing any surprises. Risks to the financial business sector were deemed low as measures of distress declined.

Regarding the property market, the RBA will look into the impact of greater scrutiny by regulators and any potential impact of changes to investment lending. However, it seems oversupply concerns are limited and confidence in domestic banks remains sound. 

The ASX 200 barely flinched today and has been oscillating around breakeven for most of the day. It’s been a very mixed performance across the board, with the banks helping to steady the ship.

Euro remains in downtrend

Ahead of the European open, we are calling the major bourses weaker. EUR/USD remains quite resilient and there is a bit of optimism on the Greek front as well, which is giving the single currency a bit of a tailwind.

While EUR/USD has remained resilient this week, it’s still just flirting with a downtrend resistance line that has been in place since December last year. Until we see a close above $1.1000, I wouldn’t be jumping into longs just yet as the medium-term trend is still lower.

On the calendar today, we have the German Ifo business climate reading, which is also likely to show positive signs. Whether this can keep the euro’s run going will be questionable.

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