Daily Market Update: Economic and geopolitical news from Asia sees markets remain in risk‐off mode; Irish data continue to point to healthy domestic economy
The early sessions of 2016 are certainly bringing plenty of reminders of some prominent macrofinancial and geopolitical risks facing the global outlook.
Overnight developments have included claims from North Korea that it has successfully tested its first hydrogen bomb and news of weaker than expected service sector activity in China. While there is scepticism that the detonation carried out by Pyongyang is truly consistent with a full H‐bomb, the move is in violation of UN Security Council resolutions and has reignited tensions with neighbours including South Korea, Japan and China, and has also been condemned by the US.
The Security Council is planning to hold an emergency meeting to discuss the issue, with the international response possibly set to include a further expansion of existing sanctions. In China, the latest Caixin services PMI weakened in December (to 50.2 from 51.2), following the pattern of Monday’s manufacturing equivalent. The drop in the Caixin index is at odds with the reported strengthening in the official services PMI which was released on New Year’s Day, with the resulting divergence creating some additional uncertainty regarding the underlying performance of China’s service sector. But in any case, this downside surprise serves as a reminder of the downside risk skew facing the Chinese economy as we move through the early part of 2016.
These developments have combined to generate a risk‐off tone to markets in early European trading. Most European bourses are down by between 0.5% and 1% in early trading, while US stock futures are showing losses of over 1%. On the currency markets, the uptick in risk aversion continues to benefit the yen which has been the leading performer among the majors over the past 24 hours, chalking up gains of 0.9% and 1.6% against the dollar and euro respectively. Dollar outperformance is also a mini‐theme, with Eur/USD continuing its retreat from its post‐ECB highs from early December to open at $1.0720 in early trading. GBP/USD is also under pressure, and is worth keeping a close eye on in the coming sessions. A 0.4% fall since early yesterday sees the pair open at around $1.4650, within a single big figure of the 2014 low of $1.4565 – an important level that could well be tested in the days ahead.
In the US yesterday, a quiet day on the data calendar was bookended with data on December vehicle sales. These were on the weak side of Wall Street expectations in slipping back by over 4% m/m. However, this follows a very strong year for auto sales which all told saw a record 17.5 million cars and light trucks sold in 2015. This was a near 6% rise on 2014 levels, as cheap gasoline, rising employment and low interest rates combined to see last year breach the previous record year of 2000.
Meanwhile here at home, the ongoing improvement in the Irish economy was further evidenced by the continuation of downward trends in the unemployment rate and encouraging public finance figures revealed yesterday afternoon. The unemployment rate was 8.8% in December (November was also revised from 8.9% to 8.8%), a rate not seen since December 2008. On the exchequer side, a much stronger than projected tax take (€3.3bn or 1.7% of GDP ahead of target) helped to push the exchequer balance (total cash received less cash paid out by the exchequer) down from €8.2b in 2014 to €62m in 2015, although a number of once‐off transactions (e.g. the sale of state assets) help flatter the headline exchequer balance somewhat.
The general government deficit looks set to come in at around ‐1.5% of GDP, which would constitute an outperformance of both the original EU target of ‐2.9% and the Department of Finance projection of ‐2.1% published in the Budget last October. Overall, tax revenue rose by 10.5% y/y in 2015, an increase consistent with the robust economic growth observed over the last 12 months. The services PMI was also released this morning, coming in at 61.8 in December, indicating a continuation of the solid expansion of the services sector through the end of the year.
Turning to the day ahead, a raft of purchasing managers’ indexes focused on the services sector are released. Investors will be keen to gauge whether any spill over from the softer than expected manufacturing PMI and ISM figures announced on Monday will seep into the much more important UK services PMI and US non‐ manufacturing ISM published today. Expectations are for the UK services PMI to edge down from 55.9 to 55.6 – still a healthy level – and for the non‐manufacturing ISM to tick up from 55.9 to 56.0 in December.
We also get some interesting releases from the US. An important lead in for Friday’s payrolls print will be the ADP employment report and expectations are for an announcement of 198k private sector jobs added in December following 217k in November. The November trade balance should give some insight into the drag that net exports will have on the headline GDP figures for Q4 and expectations are for a deficit of $44bn – reasonably in line with the 2015 average of $44.4bn – following $43.9bn in October. The minutes of the Fed’s December meeting will also be reported – although as a press conference was held after the meeting, little new information is expected. Finally, Fed Vice Chairman Fischer will give an interview to CNBC.