The State Of The Global Economy And Investor Sentiment

The Eurozone and Britain Remains Strong…

Contrary to the musings of anti-Brexiteers, the Eurozone is soldiering ahead in its economic recovery path. This, despite the June 23 referendum when Britons voted to break from the Eurozone in an historic plebiscite. While it is still early days, the preliminary data indicates that the Eurozone may well have weathered ‘Hurricane Brexit’, and may be moving towards an economic recovery. Of course, the fact that business activity is inching towards its highest level in 7 months is a feather in the cap of European resilience.

One of the most important economic measures is the European PMI (purchasing managers index), and it is an indication of the corporate health of the political and economic bloc. In August, the PMI increased to 53.3, 0.1 points higher than the July figure of 53.2. While this is a modest gain, it indicates a clear direction of change and it is positive. Any PMI reading over 50 indicates economic growth and expansion, while a reading beneath 50 indicates economic contraction. Additionally, the ESI (economic sentiment indicator) also rose, as indicated by economic data releases on Tuesday, 23 August 2016.

Preliminary Data Confounds Economists and Analysts

This data flies in the face of naysayers who believed that Britain would face massive economic turbulence in its housing market, employment sector, and foreign direct investment levels. Additionally, the GBP has bounced back from a 31-year low in the aftermath of the Brexit vote, and is now trading in a comfortable range between 1.30 and 1.32 to the greenback. With respect to a British exit from the Eurozone, it appears that the resilience of the European economy has won out. Additional data collected from various bank lending surveys confirm that the Eurozone economy has weathered the worst of it.

In the UK, declines in commercial properties during the month of July were reported. However, consumer spending appears to be holding up well. Residential sales of properties have shown little change post-Brexit. But concerns remain about what the long-term implications will be in a post-Brexit era in Britain. If it turns out that a Brexit gives rise to a Grexit, and possibly a move towards Scottish independence, the deeper implications will be destabilising to the global economy. Speculators are having a field day with all the conjecture, and the GBP/USD and EUR/GBP pairs are enjoying particularly high trading volumes among FX traders. In terms of the broader economic impact, sovereign bond markets have been stable.

However, caution remains the order of the day. In coming months, purchasing managers index data could reflect declining growth rates. This will likely occur as a result of political changes in the European landscape. One such political events that will cause upheaval is the Italian referendum in October. Additionally, the November 8 presidential election in the United States is likely to be a major driver of economic sentiment. Overall, August was a good month for European purchasing managers index data, as it reached a 7-month high.

Economists Await the ECB Meeting on September 8

The European Commission (EC) released its own CCI (consumer confidence index) report which detailed a drop in spending from -7.9 to -8.5. This is an ominous sign for growth, given that the European Central Bank has been pushing hard for quantitative easing with asset repurchases and interest-rate cuts. On Thursday, 8 September 2016, the ECB will be meeting with its governing council to discuss the possibility of increasing the timeframe for the bond buying programme. Various measures are under consideration to hit the 2% inflation target and stimulate economic growth. It is uncertain which way the ECB will go at this point. The safe money is on a resilient Eurozone economy and a slowly strengthening UK economy.