- France and Germany both beat expectations in a closely-watched survey, but analysts warned eurozone sentiment is at a six-year low
- Boris Johnson is travelling to Paris to meet French president Emmanuel Macron after talks with Angela Merkel
- Asia remains flat overnight after US stocks held their gains following the release of Fed minutes
- Mr Johnson should remind Macron of these three economic truths over lunch
- Ambrose Evans-Pritchard: We mustn’t leave trade hostage to Channel choke-point
The five key problems facing the German economy
Last Wednesday, German GDP figures figures showed Europe’s largest economy contracted in the second quarter. That fall puts Germany halfway to a technical recession — defined as two quarters of negative growth. Since then, we’ve had some heavy hints that the German government is looking into ways it can stimulate the economy.
But how did things get like this? My colleague Tom Rees has taken a look at the cocktail of issue facing Germany. He writes:
Its export-reliant economy avoided a technical recession — two consecutive quarters of falling GDP — by a whisker last year but could fail to escape for a second time.
- You can read his full explanation here: How trade war and no-deal Brexit fears are weighing down Germany’s struggling economy
NMC Health shares surge after reports of takeover
Despite its downbeat appearance, the FTSE 100 is being sharply pulled up Abu Dhabi-based healthcare provider NMC Health.
The company’s share price has surged over 26pc up after Reuters reported two groups, including one backed by Chinese equity giant Fosun, have made competing bids for a 40pc stake in the company.
The company announced earlier today it has beaten half-year expectations, with revenues of $1.24bn versus a predicted $932m.
Chief executive Prasanth Manghat said:
Our ability to perform strongly in a challenging environment testament to NMC’s strategy of developing niche, differentiated verticals in our core markets that provide the best possible care for our patients.
Despite the climb, the company is still down on the year, having shed nearly 30pc before the jump today. It has suffered particularly recently after being an unintended victim of hedge fund Muddy Waters Research’s drive-by on Burford Capital.
Jefferies analysts are sceptical about the rumoured sale, writing that shakiness in other parts of NMC’s operations mean “even if the stake is sold at a market premium we would view this development with caution”.
European stocks take turn for the worse
That neutrality was never likely to last, and Euro stocks are now broadly down — although Spain is enjoying a bounceback from some recent underperformance.
Sterling holds flat ahead of Johnson/Macron meeting
You can follow the latest political updates here: Brexit latest news: Boris Johnson set for showdown in Paris as allies say meeting with President Macron will be a ‘discussion’
I’ll bring you the reaction from the markets here.
Iron price continues to sink as analysts say there’s further to fall
Tumultuous summer markets have played havoc with commodity prices, pushing gold up to recent highs and pushing oil dramatically down despite Saudi Arabia’s best efforts to prop its price up.
Another victim has been iron, which after soaring earlier this year amid a drop in supply, has seen a major fall from grace as global manufacturing slowdown cuts into demand.
Liberum analysts Richard Knight and Ben Davis say:
The July Chinese data dump confirmed the out-of-cycle rally in Chinese property construction has likely peaked and along with it, iron ore demand.
They’ve created this graph, showing the downturn in Chinese demand for pig iron:
But it might not be all bad. Deutsche Bank’s Jonathan Jayarajan writes:
We expect evidence of a retightening in both iron ore and steel markets as the high demand season arrives from September, which should then be supportive for prices
European markets flat, FTSE falls slightly as Ocado weighs
Stock markets on the continent, which broadly opened downbeat this morning, are now almost totally flat, with the Europe-wide STOXX 600 about 0.1pc down.
The FTSE 100 is currently down about 0.35pc, with Ocado dragging most heavily among blue-chips following news of a fire at one of its sites in Kent this morning. The company said:
A small fire was reported at Ocado Group’s customer fulfilment centre in Erith yesterday evening. The fire occurred just outside the building in a hopper containing waste packaging. The London Fire Brigade was in attendance and the fire has now been extinguished. No part of the material handling equipment was involved.
My colleague Michael O’Dwyer has a full report on the incident:
PMI figures show ‘continued services/manufacturing split’
With the individual numbers pulled apart, the trend remains the same one we have seen across recent months: led by Germany, the eurozone’s manufacturing weakness is being counterbalanced, for now, by continue services growth.
Preliminary PMI estimate from Markit for the Euro Area shows a continued services/manufacturing split. Composite PMI for August was 51.8, consistent with c. 01%-0.2%q/q GDP growth with services at 53.4 & manufacturing output at 47.8. pic.twitter.com/hRdQ2d9PN3
— Rupert Seggins (@Rupert_Seggins) August 22, 2019
The broader picture, it’s fair to say, is pretty gloomy:
Eurozone growth remained muted in August amid ongoing manufacturing struggles. Flash PMI registered 51.8 (51.5 – Jul), still one of the weakest seen for 6 years. Exports were down for the 11th straight month and jobs growth was the weakest in over 3 yrs. https://t.co/6lzr6xjG5f pic.twitter.com/rABDQOIy8J
— IHS Markit PMI™ (@IHSMarkitPMI) August 22, 2019
So what do the figures mean? Despite beating estimates, the continued gloom will do little to shake the European Central Bank from its barely-disguised plans to stimulate the eurozone next month, with interest rate easing to encourage borrowing and other measures expected.
Minutes from the ECB’s governing council (due just after noon) may shed more light on what we can expect, but ECB President Mario Draghi already strongly hinted at plans last month so it might be more of the same.
IHS Markit analyst: German remains at risk of recession
IHS Markit’s Andrew Harker says Europe’s largest economy still faces the danger of a technical recession (two consecutive quarters of negative growth) as companies’ outlook turns ever sourer:
France was a relative bright spot in August, seeing manufacturing return to growth alongside a further solid expansion of services activity. The same can’t be said for Germany, however, where new orders fell to the greatest extent in over six years and firms were pessimistic around the future path for activity. The risk remains, therefore, that the euro area’s largest economy will have fallen into technical recession in the third quarter.
Eurozone sentiment lowest since 2013
In its full report on the results, IHS Markit said sentiment in the eurozone has hit a six-year low.
Sentiment was down to the lowest since May 2013, with confidence weaker across both monitored sectors. Softer optimism was recorded in France and the rest of the eurozone, while German firms were pessimistic about the prospects for business activity for the first time in almost five years.
Here’s how the German and French results from earlier look:
🇩🇪 Flash PMI numbers for Germany suggest weakness has persisted into Q3. Headline index recorded 51.4 (50.9 – July), but new orders fell at fastest rate since April 2013, while business confidence was negative for first time since Nov 2012. Read more: https://t.co/4oZ9Tcq3cs pic.twitter.com/K6SNgEWSHv
— IHS Markit PMI™ (@IHSMarkitPMI) August 22, 2019
🇫🇷 Flash France PMI shows stronger growth, with headline index rising to 52.7 in Aug (51.9 – Jul). Manufacturing returned to expansion, while services activity increased at the fastest pace in 9 months. More: https://t.co/HTk4rWUL5S pic.twitter.com/VH8XJYn4zJ
— IHS Markit PMI™ (@IHSMarkitPMI) August 22, 2019
Eurozone beats PMI expectations after France’s strength lifts bloc
The eurozone, as might be expected following data from France and Germany earlier this monring, has also beaten expectations:
Manufacturing: 47 (survey: 46.2, previous 46.5)
Services: 53.4 (survey: 53, previous 53.2)
Composite: 51.8 (survey: 51.2, previous 51.5)
Still plenty of cause for concern in German figures as manufacturing continue to slide
Despite the expectation-beating figures, there’s still plenty of negative sentiment in the full IHS Markit/BME PMI report, which showed an eight consecutive month of decline in Germany’s manufacturing sector.
The majority of businesses survey expected a downturn in the next year — the worst reading in about nine years. In its report, IHS Markit said:
Concerns about demand was one of several factors — alongside heightened uncertainty, weakness in the car industry and geopolitical tensions — behind a decrease in business confidence in August
German PMIs surprise to the upside but details still look grim overall.
— Frederik Ducrozet (@fwred) August 22, 2019
The manufacturing drop was not as bad as expected, but still showed a continued slump in the country, which has seen its exporter-heavy economy stung by global fears.
German companies brace for recession as orders crumble, BBG reports. German manufacturing shrank for 8th month in Aug, barely offset by services, acc to IHS Markit. Overall business confidence declined & orders fell for 3rd time in 4mths. PMI at 51.4, close to lowest in 6yrs. pic.twitter.com/0GcJQ72a2a
— Holger Zschaepitz (@Schuldensuehner) August 22, 2019
It’s also hard to be sure how reliable the PMI data is, given it has recently indicated growth despite the Germany economy contracting.
The problem with the Markit Composite PMI for Germany is that it has suggested growth for periods we know the economy has contracted…So what does 51.4 actually means?
— Shaun Richards (@notayesmansecon) August 22, 2019
That negative twinge might take the edge off France’s strong results this morning, which Emmanuel Macron will undoubtedly be feeling happy about as he prepares to meet with Boris Johnson.
Pantheon Macroeconomics’ Claus Vistesen says: “the PMI data send a clear signal that the French economy is standing tall in the middle of an overall EZ slowdown driven by weakness in Germany and Italy.” He added that the German PMI data was “more optimistic” than other measures that the country is not heading for a recession.
German PMIs also beat expectations
German data is in! Europe’s biggest economy has joined neighbour France in posting better-than-expected results. This might improve sentiment around the euro today, but upcoming ECB minutes are still the crucial thing to watch.
Manufacturing: 43.6 (survey: 43, previous 43.2)
Services: 54.4 (survey: 54, previous 54.5)
Composite: 51.4 (survey: 50.6, previous 50.9)
Ocado reports fire in factory
Retail Week report Hugh Radojev tweets:
Fire occurred outside the warehouse building “in a hopper containing waste packaging” and has now been extinguished
— Hugh Radojev (@hradojev) August 22, 2019
That’s the second fire to afflict the grocery delivery firm in a year. I’ll bring you more as details emerge.
Could France’s strong performance spill over to Germany?
Given the two economies’ close ties, good news for France means we might expect Germany also to beat expectations. As a reminder, Europe’s biggest economy is not in the best shape currently, so how its manufacturing sector has performed will be especially worth watching.
All eyes on the German PMIs this morning for signs of spillovers from manufacturing to services.
— Frederik Ducrozet (@fwred) August 22, 2019
France beats expectations as manufacturing returns to growth
French PMI data is in, and it has blown past expectations. Manufacturing and services both beat expectations, with the former returning to growth after a dip last month. Here’s how the figures look:
- Manufacturing: 51 (survey: 49.5, previous 49.7)
- Services: 53.3 (survey: 52.5, previous 52.6)
- Composite: 52.7 (survey: 51.8, previous 51.9)
PMIs expected to show darkening picture for European economy
Over the next hour or so, we’ll be getting purchasing managers’ index data for August from France (at 8:15am), Germany (at 8:30am), and then the eurozone as a whole (at 9am).
PMI figures, which indicate buying behaviour across different economic sectors, are closely-watched to determine economic trends and predict official figures.
Overall, they’re expected to show a slightly worsening picture on the continent according to a Bloomberg survey of economist and analysts. They predict the two biggest euro economies will show a lower result in the measure (in which a score above 50 indicates growth).
For the composite figures, the survey’s expectations are:
- France: 51.8 (July 51.9, –0.1)
- Germany: 50.6 (July 50.9, –0.3)
- Eurozone: 51.2 (July 51.5, –0.3)
Laura Ashley swings to a loss
Laura Ashley blamed a lack of consumer appetite for its furnishings as well as the challenging conditions across the retail sector as it swung to a loss in the year to June.
Pre-tax losses came to £14.9m against a profit of £100,000 last year. Sales also fell to £232m from £257m a year earlier.
Investors were already expecting the worst after the retailer issued two profit warnings in quick succession earlier this year.
Agenda: Boris Johnson goes to Paris
Good morning. Yesterday, sterling fell as low as $1.211 against the dollar and €1.091 against the euro on rising expectations of a no-deal Brexit.
Prime Minister Boris Johnson is on a tour of Europe’s power centres as he tries to bring about a Brexit breakthrough. Yesterday, he met with German chancellor Angela Merkel in Berlin and he will meet with French president Emmanuel Macron in Paris today.
5 things to start your day
1) Dynasties at war over Berlusconis’ TV deal to fight US streamers: It is a battle that has two of the Continent’s wealthiest dynasties going head to head. Both have dreams of a pan-European television empire capable of withstanding the streaming onslaught of US tech giants — and both have a history of giving their opponents no quarter.
2) Now the US has relaxed a rule banks hate, will they start making the sort of dodgy bets that sparked the financial crisis? asks Lucy Burton. Paul Volcker, whose decades-long career in Washington saw him serve under six presidents, once famously said that the only useful innovation from banks in recent history was the automatic teller machine.
3) Cobham’s proposed sale will rack up fees of almost £220m for banks and other advisers if the purchase of the FTSE 250 aerospace and defence company by a US-led private equity consortium goes ahead. The sale which values Cobham at £4bn will rack up charges estimated at between £166m and £190m for buyer Advent and £29m for the target company, according to the scheme of arrangement document posted on Wednesday.
4) Surging government spending and weak revenues are pushing up the budget deficit, leaving the Treasury on track for a surge in borrowing of £26bn this year, economists warned, potentially taking the deficit to nearly £50bn even before any extra no-deal Brexit spending.
5) The cost of the trade war to American families will surge to $1,000 (£819) a year each after the US imposes a new round of tariffs on Chinese goods, according to Wall Street analysts. US shoppers will face a surge in costs from a 10pc tariff hitting another $300bn of Chinese goods later this year, lifting the impact of Mr Trump’s trade war on households from around $600 to $1,000, JPMorgan calculated.
What happened overnight
Asian shares went flat on Thursday as uncertainty over the outlook for both US interest rates and the chance of global fiscal stimulus sucked the life out of markets.
Moves were miniscule, with MSCI’’s broadest index of Asia-Pacific shares outside Japan off 0.2pc in very light volumes.
Japan’s Nikkei added 0.1pc, as did Shanghai blue chips. But in Hong Kong, the Hang Seng Index fell 0.87pc by lunch.
Wall Street was saved yesterday by surprisingly upbeat results from retailers, which sent Target surging 20pc and fellow retailer Lowe’s up 10pc.
The Dow ended Wednesday up 0.93pc, while the S&P 500 rose 0.82pc and the Nasdaq 0.9pc.
Less welcome were minutes of the Federal Reserve’s July meeting, which showed policymakers deeply divided over whether to cut interest rates, but united in wanting to signal they were not on a preset path to more easing.
Coming up today
Full-year results for Laura Ashley are likely to be gloomy. The retailer has already warned that it expects to miss expectations amid falling furniture and decoration revenues.
Full-year results: Laura Ashley
Interim results: Anglo Pacific Group, Antofagasta, John Laing Group, NMC Health, Playtech, Premier Oil, Rank Group, Sportech
Economics: CBI retailing (UK), consumer confidence (eurozone), manufacturing and services PMIs (US and eurozone) jobless claims (US)
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