Originally published by Rivkin Securities
European equity markets rose along with the euro and sovereign bond yields on Tuesday following manufacturing PMI reports and unemployment data that highlighted the broadening recovery within the Euro-zone. Overall the reading (MoM Apr) for the Euro-zone was 56.7 up from 56.2 in March, the fastest pace in six years. France, Italy and Austria all saw growth rates at the fastest in six years while Germany remained around six year highs. The report highlights strong job gains underpinned by stronger confidence while price pressures continue to build as the backlog of orders grow and supply times increase, a sign of increasing demand. All of this is an encouraging sign for the ECB as they look to begin tapering stimulus at the end of 2017.
Elsewhere Euro-zone unemployment remained stable at 9.5%, the lowest levels since 2009. The Euro STOXX 600 rose +0.75% to the highest levels since August 2015, the CAC 40 gained +0.70% as did the DAX up +0.56%. German yields were little changed, while both the French two and 10-year yields increased +3.4 and +2.4 basis points respectively. Italian two and 10-year yields also rose +1.5 and +2 basis points respectively.
The spread for French ten-year yields over German counterparts decreased to +0.422%, the lowest levels since December shown on the first chart below. This undoubtedly still reflects some concerns about the final round of French presidential elections on Sunday although a victory by Emmanuel Macron has been largely priced in with polling suggesting Macron will win 60% of votes. While we may see some gains in European equities should this outcome eventuate, it is unlikely to be similar to the relief rally seen following the first round of voting on April 23rd. Politics remain a risk in 2017 for Europe, however the economy is improving and markets continue to respond positively to this.
Locally the S&P/ASX 200 reversed the majority of declines of up to -0.63% to finish -0.10% after a following the Reserve Bank of Australia’s decision to leave interest rates unchanged as widely predicted. The message from Phillip Lowe was little changed, unemployment remains mixed but is expected to improve, and inflation is below target but also expected to rise slowly, while the housing market remains a key focus as debt has outpaced income although supervisory measures by APRA are expected to help with this. Interest rate probabilities suggest no action by the RBA is likely until mid-2018.
Australian bond yields rose with the two and 10-year up +1.4 and +3 basis points helping the Australian dollar gain +0.16%. This morning we can expect a relatively flat start to trading with ASX SPI200 futures down 4 points in overnight trading.
Data releases:
· German Unemployment (MoM Apr) 5:55pm AEDT
· Euro-zone Producer Prices (MoM & YoY Mar) 7:00pm AEDT
· Euro-zone GDP (QoQ & YoY Q1) 7:00pm AEDT
· US ADP Employment (MoM Apr) 10:15pm AEDT
· US ISM Services/Non-manufacturing Composite (MoM Apr) 12:00am
· US Crude Oil Inventories (Apr 28th) 12:30am AEDT
· US FOMC Rate Decision 4:00am AEDT
Chart 1 – French – German Ten Year Yield Spread
