Political Concerns Outweigh Data Strength

February 6, 2017

France’s National Front’s pre-presidential election manifesto was released, calling for France to leave the European Union and for tighter restraints on immigration.

It was always a bit peculiar how an investment community prior to the U.S. election had been publicly worried about the Republican candidate’s “drain the swamp” promise but converted to true believers afterward. The uneasy mood is having a resurgence, as more action seems to be happening on the U.S. trade and immigration fronts than on tax reform, changing health care policy and infrastructure spending.

German industrial orders leaped 5.2% in December, seven times faster than forecast. This was the biggest monthly advance since July 2014 and was led by a 14.7% upsurge in domestic demand for capital goods, a leading indicator of business investment. The 12-month increase in orders of 8.1% in December was four times greater than in November. Total orders grew 4.2% in 4Q16 versus 3Q.

Although Germany’s construction purchasing managers index settled back to 52.0 in January from a 9-month high of 54.9 in December, the survey revealed a record high reading in the business outlook component of this 17-year-old data series.

The French retail purchasing managers index jumped 2.7 points to a 63-month high of 53.1 in January, and Germany’s retail PMI was above 50.0 for a second straight month. The Italian retail PMI sank to a 4-month low of 45.6, however, so Euroland’s retail PMI essentially stagnated with a reading of 50.1.

Investor confidence toward the euro area, according to the Sentix gauge, stayed strong in February with a reading of 17.4 versus 18.2 in January, 10.0 in December, 13.1 in November 8.5 in October, 5.6 in September, 4.2 in August, and 1.7 last July.

A 74-basis point spread between the 10-year sovereign French bond yield of 1.12% and the 10-year German bund yield of 0.38% widened seven basis point today to its most vast spread since 2013. The 10-year British gilt yield dipped two basis points, and futures trading in U.S. 10-year Treasuries signal a two-basis point dip as well. The 10-year JGB yield didn’t fall from Friday’s 0.09% yield and thus remains some distance above the Bank of Japan’s target of around zero percent.

Gold strengthened to a three-month high of $1,228.40 per ounce. West Texas Intermediate crude oil rose 0.4% to $55.02 per barrel, representing the top end of its recent trading range.

Equities performed well in Asia but not so in Europe. Equities rose 1.4% in Hong Kong, 0.9% in Taiwan, 0.7% in India and Indonesia and 0.3% in Japan. Stocks fell by 1.4% in Greece, 1.0% in Italy, 0.4% in Germany and Spain, and 0.1% in France.

Australia’s market went up 0.7% in spite of a weaker-than-anticipated 0.1% dip in retail sales there during December. But retail sales in the fourth quarter were up by a solid 0.9%, and nominal sales in December were 3.2% greater than at end-2015.

The dollar is mixed. It climbed 0.4% against the euro, 0.3% relative to the Australian dollar, and 0.2% vis-a-vis the Swiss franc but also fell by 0.2% versus the yen and Mexican peso and 0.1% against the kiwi. Sterling, the loonie, and kiwi are unchanged.

European Central Bank President Draghi testifies today before the EU parliament in Brussels.

New Zealand markets are closed for Waitangi Day, celebrating the signing in 1840 of that country’s founding document.

China’s privately measured composite and service-sector purchasing managers indices printed in January at a 4-month low of 52.2 and a 3-month low of 53.1, respectively. The December readings of 53.5 and 53.4 had signaled the fastest growth in 45 and 17 months.

On-year growth in Japanese labor cash earnings of merely 0.1% in December was disappointing, and the inflation-adjusted measure relapsed into the red with a negative 0.4% on-year change.

Non-oil PMI readings for January from Egypt, Saudi Arabia and the United Arab Emirates were at 4-, 17- and 6-month highs of 43.3, 56.7, and 55.3. Readings above 50 show expanding activity. Egypt’s PMI has been below that threshold for sixteen straight months.

The global composite and service sector PMIs, compiled at J.P. Morgan, were at 53.6 (a 22-month high) and 53.9 last month.

December-over-December growth in industrial production in Norway accelerated to 3.7%. Czech retail sales over the same span slowed to 3.0%.

On super bowl Sunday in America, the National Football League championship game was decided in a sudden death overtime for the first time since the Baltimore Colts beat the New York Giants in 1958, which is broadly referred to as the greatest game ever. The New England Patriots won yesterday’s game for the franchise’s fifth super bowl win.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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