Four Developments and Implications

Currency in Crisis

There have been four noteworthy developments today that will shape the investment environment.  

First, HSBC flash PMI for China came in at 49.7 from the final January reading of 48.8.  This will support those who expect a soft landing in China. Technology and consumer services led today's 1% advance in the Shanghai Composite, which  now sits at its highest level since early December 2011.  The soft landing scenario in China helps lift sentiment in the region.

Second, the minutes from the Bank of England meeting was a bit of a dovish surprise.  There were two dissents to the decision to increase gilt purchases by GBP50 bln.  Both Miles and Posen favored a larger purchase program.   Sterling is clearly under-performing today, though gilts are outperforming.  

Third, the flash PMI from Europe was uninspiring.  The manufacturing showed a slight improvement to 49.0 from 48.8, but expectations were for a larger increase to 49.5.  It remains below the boom/bust level of 50.  Of note that  orders appeared to fall at a slower pace.  The service component actually worsened.  It stands at 49.4 from 50.4 in January.  

Germany's readings were particularly disappointing.  The manufacturing survey was reported at 50.1 down from 50.9, while the consensus hoped for 50.9.  The German service PMI came in at 52.6, off from 54.5 last time and below the consensus as well (54.5).  

France's flash readings were more mixed.  Its manufacturing surprised to the upside, popping back above 50 (50.2) from 48.5 last and expectation of 49 this time.  The disappointment was with services.  The 50.3 reading shows expansion, just barely.  The January reading was 51.7 and the consensus expected improvement. 

The weakness in services is noteworthy as it more likely reflects weakness in domestic demand, while manufacturing could be partly a function of weaker foreign demand.  The ECB interest rates are on hold, as it continues to focus on liquidity and the upcoming 3-year lending.  While the euro zone economies do not appear to be accelerating to the downside, as looked to be the case after poor performance at the end of last year, the combination of austerity, de-leveraging and tighter credit conditions still indicates the economic risks are to the downside.

Fourth, turning your attention to Greece, Fitch weighed in and cut the sovereign rating to C from CCC.  This can hardly be considered surprising, but that the verdict was delivered before the PSI and cannot be helpful for the general risk appetite.   While the Greek government prepares for the PSI, many in the market expect that Greece will have to invoke the collective action clauses and that this will prove too much for ISDA and that a credit event may still be declared, which would signal the triggering of credit-default swaps.  This is something European officials wanted to avoid.