PMIs crash as social distancing looks set to last, European shares softer

Morning Note

Britain faces future of social distancing. The chief medical officer for England, Chris Witty, says some disruptive lockdown measures will remain in force for the rest of the year. Pubs and restaurants may not open until Christmas. If they can before, you only need to do the arithmetic and work out that a pub which could usually count on being chock full of a Friday night won’t do much business if everyone is forced to stand six feet apart. They will lose less money by staying shut. It’s increasingly looking like a total failure by the British government to implement the testing required to get the country moving. Lockdown measures cannot become normalised.

The economic damage from these lockdowns is still providing some remarkably ugly numbers, but I think equity markets have already discounted the worst. France’s services PMI slid to 10.4 in April, while the composite index slipped to 11.2 vs 26 forecast. Germany’s composite PMI was a little better, but services were also uber-weak at 15.9. This follows some hideous PMIs overnight as Japan’s services PMI sank to its weakest since 2007. It’s notable that the severe lockdown measures that we have across Europe are not in place in Japan. Australia’s services survey down to a record low 19.6, but Australian exports climbed 29% in March thanks to a bounce back in iron ore shipments to China after a sharp decline in Jan and Feb.

When an economy has been effectively shut down it’s no surprise the PMIs will reflect it. It’s like looking in the rear-view mirror at a horrible accident – better to focus on the road ahead. France’s finance minister Bruno Le Maire says the government wants all retail outlets to open by May 11th. However, this excludes bars and restaurants – what’s the point? Germany has just announced a new €10bn package of support and is already lifting some lockdown restrictions. Test, test, test.

Meanwhile, the European Central Bank is loosening its rules on asset purchases to enable it buy so-called ‘fallen angel’ bonds – paper issued by companies not rated investment grade. Credit ratings agencies are expected to downgrade a slew of corporates from investment to junk, so this merely lets the ECB to operate how it wants – it doesn’t want to narrow the pool of available bonds and only prop up the ones who need it the least.

After the stramash of the last few days, oil has regained some stability, but I would be cautious about reading too much into any gains until we see the supply shut-ins and OPEC cuts start to reduce the flow, and the demand picks up again. Brent futures for June touched a low under $16 yesterday but rallied through to $22 and are last trading around $21.50. WTI for June also rallied from yesterday’s lows at $6.50 but twice failed to recover $16 and were last trading under $15.

European markets tried to sketch out gains in early trade as oil prices recovered some ground but the PMIs started to weigh. Shell and BP – big FTSE weightings – led the way higher before the economic hit dragged on sentiment. The FTSE 100 put on a good show yesterday, rallying 2.3% and closing near the highs at 5,770. Wall Street rallied 2% yesterday as the Senate passed a relief bill and oil recovered its footing, but stocks finished off the highs and the S&P 500 failed to close above 2800. Futures indicate mild gains.

The DAX was also firmer by 1.6% yesterday but failed to recover the trend line and has turned weaker again this morning. Daily momentum indicators have turned across indices and suggest a period of weakness.

In FX, the dollar is a tad softer at the start of the session but the dollar index remains firmly above the 100 level at 100.480. GBPUSD is flirting with the trend resistance having backed away from this yesterday following the crossover on the 1hr MACD. Bias remains to the downside, support at 1.2250 may be looked at.

EURUSD also maintains a bearish bias and took fright at the PMI horror show to dip under 1.08. Support at the early Apr lows around 1.07750 may be tested, which could open up a move back to 1.0640.