Stocks Ignore European PMI Collapse, Rise On Tech Rally

European and Asian stocks rose and US equity futures were flat, as a rally in European tech shares lifted trader mood ahead of today's ECB meeting and the latest round of US-China trade talks, even as the latest round of collapsing European PMIs was roundly ignored. The dollar climbed and Treasury yields dropped.

European tech giant STMicro rose as much as 8.4%, lifting the Stoxx 600 Technology Index to a 7-week high after investors brushed aside the chipmaker’s lower-than-expected quarterly sales forecast, focusing on better margins, expected recovery and positive indications from peers in U.S. and Asia. Increases in software and chipmaker shares pulled the Stoxx Europe 600 index higher, which shrugged off weaker euro area PMIs, trading 0.6% higher, and hovering near session peak. Technology, autos and banks lead the gains. The FTSE MIB (+1.2%) outperformed its peers bolstered by strong performance in banking names after Italian PM Conte said the Italian banking system is well capitalized and stable; with markets also looking out for any potential signals from the ECB on TLTROs.


European equity strength was somewhat puzzling as it came on the day the Germany Manufacturing PMI missed badly, printing 49.9, below the 51.3 expected, the lowest print since November 2014 and in contraction for the first time in 5 years...


... while French Service PMI tumbled to 47.5, far below the 50.5 expected, the lowest since February 2014.


The sudden plunge in Eurozone manufacturing and services sentiment suggests that the ECB will likely have to further trim its optimism for a rebound, if not turn outright dovish, a move which could send the Euro tumbling even more (it last traded at 1.1346, the lowest level since the start of the year).

Earlier in the session, Asia’s main stock markets all posted modest gains although trade was far from smooth sailing in Asia-Pac and upside in the other US majors were also capped amid ongoing shutdown concerns and trade uncertainty. ASX 200 (+0.4%) and Nikkei 225 (-0.1%) were mixed throughout the majority of the session as corporate updates dictated price action and in which energy names kept Australia afloat after Santos reported an increase in Q4 output and revenue, while Japanese exporters lacked unison amid an indecisive currency. Hang Seng (+0.4%) and Shanghai Comp (+0.4%) were initially lackluster amid ongoing trade uncertainty and following another substantial daily liquidity drain by the PBoC of CNY 250bln, but then gradually improved as money market rates declined ahead of the 2nd phase of the PBoC’s 100bps RRR taking effect tomorrow.

Meanwhile, in the US, S&P 500 index futures up 0.1%, Nasdaq +0.4% as investors continue to operate with few signals on China trade talks and in a drought of data on the U.S. economy thanks to the longest ever government shutdown. The tit-for-tat battle between President Donald Trump and Democrat leader Nancy Pelosi appears to be escalating. A vote on reopening agencies is set for Thursday.

At the same time, downbeat comments continue to emanate from the annual conclave of global movers and shakers in Davos: “Earnings expectations, particularly in the U.S., are too high,” said Bridgewater co-CIO Greg Jensen in an interview on Bloomberg TV Wednesday from Davos. “And generally the Fed and other policy makers are still expecting stronger growth than we see.”

In rates, European bonds bull flattened with peripherals leading the way. Ten-year BTPs and bonds outperform bunds by 5bps and 4bps respectively, while across the Atlantic, TSY yields were flat to 1bp lower across 2s through 10s, slight flattening bias.

In FX, the euro dropped before the ECB policy decision due out in less than an hour, weighed down by the abovementioned soft PMI data out of the euro area amid a broad recovery for the greenback during the London session. The Bloomberg dollar spot index recovered from an early loss as traders awaited fresh developments from U.S.-China trade talks; the greenback rallied against the euro in London hours to 1.1339, nearing a three-week high, after an expected rebound in French activity in January failed to materialize; composite PMI dropped to 47.9, the lowest in more than four years; Treasuries edged higher, underperforming European peers. The Aussie was the worst performing major, and hit a three-week low after National Bank of Australia, one of the big four banks, raised mortgage rates prompting concerns the central bank may have to ease policy; the AUD rallied earlier on better-than-expected employment data. Sterling dropped on profit-taking and the Norwegian krone rose after the central bank reiterated its outlook for gradual interest-rate increases.

In commodities, Brent (-0.4%) and WTI (-0.1%) pared back some of the downside seen after yesterday’s unexpected API crude stocks build of +6.55mln vs. Exp -0.4mln; with markets now looking to today’s EIA release. Separately, US President Trump has stated that oil sanctions could be imposed this week on Venezuela if the political situation deteriorates further.

Expected data include jobless claims and PMIs. American Airlines, Bristol-Myers, Union Pacific, Intel and Starbucks are among many companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.2% to 2,642.50
  • STOXX Europe 600 up 0.4% to 356.24
  • MXAP up 0.3% to 152.67
  • MXAPJ up 0.4% to 496.32
  • Nikkei down 0.09% to 20,574.63
  • Topix up 0.4% to 1,552.60
  • Hang Seng Index up 0.4% to 27,120.98
  • Shanghai Composite up 0.4% to 2,591.69
  • Sensex up 0.1% to 36,142.78
  • Australia S&P/ASX 200 up 0.4% to 5,865.69
  • Kospi up 0.8% to 2,145.03
  • German 10Y yield fell 1.4 bps to 0.211%
  • Euro down 0.3% to $1.1343
  • Italian 10Y yield rose 1.1 bps to 2.394%
  • Spanish 10Y yield fell 3.2 bps to 1.281%
  • Brent futures little changed at $61.12/bbl
  • Gold spot down 0.2% to $1,279.91
  • U.S. Dollar Index up 0.3% to 96.38

Top Overnight News

  • President Trump tweets that he will give State of the Union address when the partial government shutdown is over
  • While headline oil futures barely moved on the back of a deepening crisis in Venezuela, the price of barrels that more closely mirror the Latin American country’s supplies surged to a fresh five-year high on Wednesday relative to WTI
  • Venezuelan bond prices climbed for a fourth day as anti-government protests throughout the country spurred speculation that President Nicolas Maduro’s regime could be coming closer to an end
  • The Swiss National Bank intends to keep interest rates at a record low and can even reduce them further if the political risks dominating the outlook explode into a bigger crisis, President Thomas Jordan said
  • Malaysia’s central bank left its benchmark interest rate unchanged on Thursday, as expected, giving a little indication on whether it sees room to ease policy amid subdued inflation and weak economic growth
  • Jardine Matheson Holdings Ltd., the flagship investment firm of a 186-year-old conglomerate, plunged 83 percent, wiping out as much as $41 billion in market value, before quickly recovering, with traders speculating that a fat finger error may have caused the dramatic drop
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