Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Markets stutter, but is that all it was? PMIs point down, but not so far down. UK’s recovery some time off as PMIs point down. NIESR says real recovery won’t occur until 2018. Electric fences, stable doors, and bolting horse meat. Companies in the news: Randgold Resources, Vodafone
Markets stutter, but is that all it was?
It was the oddest of denials. Spanish Prime Minister Mariano Rajoy denied everything, or sort of denied everything yesterday. You may know that he has been linked with a corruption scandal. He, along with numerous other members of Spain’s Popular Party, has been accused of accepting payments in return for supporting the award of state construction contracts to a Spanish construction company.
Mr Rajoy said: “Everything that refers to me, and that appears there, and to some of my fellow party members that appear there, is not right, except for something that the media has published.” Maybe it is just a translation problem, but it does feel a bit like saying all the accusations are false with the exception of those that are not false.
But then he was also quoted as saying: “Never, and I repeat, never have I received, nor distributed black money.” That seems pretty unambiguous, unless that is he added the suffix under his breath: “except for those occasions when I did.”
There may be a handful of people out there who know the truth, but right now it is impossible to say.
But what we can say is that the markets don’t like it. They do like Mr Rajoy. He, along with that Mario Monti, is supposedly working miracles. They’re creating stability, creating the real prospect of recovery. You could say that the real miracle is that markets are so joyous when much of Europe suffers from social unrest on a scale that could change the political map of Europe. But let’s put that point aside.
Yesterday markets did a wobbly. If you have seen ‘Les Miserables’, you may get the next comment. Markets said: “Look down, look down, don’t look them in the eye.” All we need is for markets traders to sing those words out loud as they sell, and the parallel with ‘Les Miserables’ will be complete.
The yield on Spanish and Italian bonds rose, stocks across Europe fell. The Dax fell to a year low, and you would need to rewind the clock back all the way to 31 December last year to find the last time it was so low. As for the FTSE 100, it dropped from 6347 at the end of last week, all the way down to 6247, which was the lowest closing price since the dim and distant days of January 24.
Okay, so that was trivialising it a touch, but the falls were quite high across much of Europe, but in the UK and the US, the key indices still stand at levels which ten days ago appeared positively euphoric.
So aside from a whiff of scandal being associated with one of the darling boys of the Eurozone, are there any other reasons for cheer or commiserations to have emerged in recent days?
PMIs point down, but not so far down
The latest composite Purchasing Managers’ Indices (PMIs) for the Eurozone out this morning pointed to contraction, and yet they were greeted with something akin to triumph.
Just to remind you, the key number is 50, anything below suggests contraction; anything above, growth. The composite PMI for the Euro area – that’s the index which covers both manufacturing and services – stood at 48.6 in January. At most points during the history of this data that would have been seen as pretty awful. But it was better than last month, and better than what was suggested by the early estimate – the so called flash composite PMI. In fact it was the third month in a row to see the index rise, and it now stands at a ten month high.
It is difficult to know whether one should celebrate the index being at a ten month high, or panic that such a low reading is, in fact, the highest score since last spring.
Markit itself chose to focus on how diverse the readings are across the Eurozone. Output grew at the fastest rate for just over a year-and-a-half in Germany, – contrasting with ongoing downturns in France, Italy and Spain.
Anyway, here are the numbers:
Nations ranked by all-sector output growth (January, source Markit/CIPS)
Ireland 54.9 2-month high
Germany 54.4 19-month high
Spain 46.5 19-month high
Italy 45.4 2-month low
France 42.7 46-month low
As an aside, it is interesting, but not surprising, to see France so low. The writing has been on the wall, and indeed in this blog, for some time.
UK’s recovery some time off as PMIs point down
It wasn’t a triple hit, but it was close.
UK manufacturing had a good January; services had an alright one, and construction was a little disappointing. Put it all together and the composite index suggests the UK will avoid a triple dip recession.
So here is the story, sector by sector.
The headline manufacturing PMI signalled an overall improvement in business conditions for the second month running, fuelled by the strongest monthly increase in output for 16 months. The Output Index from the survey jumped from 53.4 in December to 54.2.
Construction industry output fell slightly in January, contracting at the same rate as December. The PMI activity index held steady at 48.7. The current rate of contraction is one of the steepest since early 2010.
Markit said: “Construction bucked the downward trend seen in the wider economy late last year, growing by 0.3% in the fourth quarter according to the official data. If we assume that the strong divergence between official data and the PMI seen throughout much of last year has ended, the PMI suggests that construction could act as a mild drag on the economy again in the first quarter.”
As for services, the headline seasonally adjusted Business Activity Index rose back above the 50.0 no-change mark in January to signal a return to expansion, following December’s first fall in activity for two years. At 51.5, the index was indicative of a modest rise in activity, though still the best since last September.
So, put all that together and what does the picture look like? The all-sector Output Index from the three PMI surveys rose from 49.8 in December to 51.7 in January, signalling the strongest pace of expansion for four months.
But if it wasn’t for the snow, the story would have been even better. Markit stated: “Stronger growth would inevitably have been recorded across the three sectors in January had the country not suffered heavy snowfall in the second half of the month. However, the anecdotal evidence from survey contributors suggests that the overall impact of the snow was quite modest, depressing the all-sector output index by around one index point. Taking the estimated impact of the snow into account, a resulting PMI reading of 52.7 would have signalled the strongest monthly increase in output since last April.”
As for the number we really need to know, Markit concluded that the January PMIs were consistent with growth of 0.1 per cent. Strip out the effect of the snow, and growth would have been 0.2 per cent.
It is hardly the stuff of runaway boom, and not really the kind of data we require to justify the market euphoria of recent weeks, but it points to growth, and perhaps we should be grateful for that.
NIESR says real recovery won’t occur until 2018
Meanwhile, the National Institute of Economic and Social Research (NIESR) has released forecasts for the UK economy. Here are the headlines.
The economy, after seeing zero growth in 2012, is expected to grow by 0.7 per cent in 2013 and 1.5 per cent in 2014.
NIESR expects consumer price inflation to average 2.4 per cent this year and 2.3 per cent in 2014.
It expects unemployment to stabilise at about 8 per cent, and to begin a sustained fall in 2015.
NIESR also expects public sector net debt to peak in 2016–17, at about 85 per cent of GDP.
The key bit, however, is this:
NIESR predicts that GDP will reach a new high in 2015, but says that real per capita GDP will not recover its peak until 2018.
Electric fences, stable doors, and bolting horse meat
And so George Osborne says that the ring fences will have an electric current running through them. Banks must keep their risky activities separate from traditional retail banking, and if they don’t Mr Osborne will turn the electricity on.
So there you have it.
Strong words. Just don’t forget that while proprietary trading is not very popular, the underlying reason why the financial world went into meltdown in 2008 was because of mortgages. Northern Rock was not an investment bank, nor was HBOS, but they were the biggest casualties in the UK.
In the US, Standard and Poor’s is being sued by the US government for its failure to warn of the crisis in the making. Maybe while it is at it, the US government should sue the IMF, which welcomed mortgage securitisation and said it reduced the risk of a banking crisis, and then while it is at it, perhaps the US government could sue central banks.
Perhaps the Bank of England can be the next BP and fall foul of US regulators’ wrath.
It is just too tempting to avoid referring to locking the stable door after the horse has bolted.
Companies in the news
Bull: At the ‘Telegraph’, Randgold Resources fell under the Questor spotlight. Gold has not done so well during recent rises in shares, and the apparent return of confidence. Questor pointed out that the company’s assets are supposed to be tier one, and said that gold should benefit if investors decide to flee risk again. So it said “buy”.
Bull and bear: At the ‘Times’, Tempus took a look at Vodafone. It suggested “hold” on the belief that dividends will not be cut.
Bear: But the ‘Times’ was less sure about Randgold Resources, and – unlike bullish Questor – said that even with the unrest in Mali largely assuaged, the shares still look pricey.