Asian markets started the week on a strong foot today following an upbeat report out of China which saw the HSBC finally climb out of contraction. Despite this, the European markets are looking a little tentative given the ongoing escalation within Iraq which has seen further key targets taken by the ISIS militia group.
As such the European futures point towards a mixed open with the FTSE 100 +6, DAX -1 and CAC 40 -0.5 points.
Today looks set to be dominated by PMI figures, with the likes of Germany, France, Eurozone and US figures due later. However, the Asian session has already seen two key figures, with the Japanese and Chinese manufacturing PMI figures released overnight. Both of these figures were highly notable for very different reasons, yet highlighted a return to strength from a period of downturn. In Japan the imposition of a higher sales tax in April drove this measure sharply lower into contraction despite the previously buoyant manufacturing sector.
However, today’s reading of 51.1 represents the first expansionary figure in the three months since the tax and thus highlights that it may have had a more short term impact than many had expected. The implication of this if expanded across more of the key indicators would be that markets will begin pricing in a tighter BoJ monetary outlook where additional asset purchases become increasingly unlikely.
In China, today’s figure of 50.8 represents the first time in in six months that the manufacturing sector expanded according to HSBC. This PMI figure has recently become the front line in the slowdown of the region, paving the way for losses in the official government PMI figure.
It’s focus upon small and medium sized enterprises means that any weaknesses were always likely to be reflected to a greater degree within the HSBC figure given that they typically do not get the same access to credit and favourable conditions that the largest Chinese firms enjoy.
The ability of these smaller firms to move back into growth provides us with more confidence of a recovery from the recent slowdown and shows that the stimulus measures introduced earlier this year are having a positive effect.
Despite these positive figures out of Asia, Europe is looking somewhat nervously across to Iraq, where the expansion of ISIS held territory means that the US and Western forces are becoming increasingly caught between a rock and a hard place in relation to potential military involvement. The capture of border crossings into Syria means that there are now sections of the border which ISIS militants can cross freely from war torn Syria.
Iraqi officials have already requested military assistance from the US, yet the feeling is that the current Iraqi premier Nuri al-Maliki is too divisive and has not pushed through the inclusive reforms the US wanted him too, instead favouring Shi’ite interests. Given that ISIS seeks to split the country, the US seeks a leader who represents both Sunni and Shi’ite which will better position the country to deal with the ISIS threat.
However, it is likely that the US would prefer the country to be in the hands of the government than ISIS and thus as the threat grows, they will have to decide if and when they wish to step as the election of a new premier would likely take time and organisation that is in short supply at the moment.
The European session points to further PMI figures dominating affairs, with the flash manufacturing and services PMI surveys due for the French, German and Eurozone economies as a whole.
For the large part it will be the manufacturing sector which is of most importance, especially within the German figure. However, it could be the French data which steals the headlines as it pushes ever closer to the expansionary 50 mark.
The manufacturing sectors in both France and Germany are key contributors to Eurozone growth and thus any strong or weak performance today could also feed into the Eurozone figures which will be heavily weighted towards the larger performers.