Crashing China Got You Down? Don't Worry, There's A "Soaring" Europe For That

by Tyler Durden

Plunging Chinese manufacturing and an 11 month low PMI got you down? Don't worry: there's a resurgent Europe for that, which overnight reported that manufacturing and service PMI in Germany and, don't laugh, France soared far above expectations (German Mfg and Services PMIs of 50.3 and 52.5, up from 48.6 and 50.4, and above expectations of 49.2 and 50.8; French Mfg and Services PMIs of 48.3 and 49.8, up from 47.2 and 48.4 and an 11 and 17 month high, respectively, blowing away expectations of 47.6 and 48.8). The result was a composite Eurozone Manufacturing PMI of 50.1, above 50 for the first time since February of 2012, up from 48.8 and at a 24 month high - reporting the largest monthly increase in output sunce June 2011, as well as a composite Services PMI of 49.6, up from 48.3, and an 18 month high. In other words, European Composite PMI is expanding (above 50) for the first time since January 2012.

What drove this European renaissance: record debt/GDP, all time bad loan highs, record low private credit creation, record (and surging) unemployment, Spanish mortgages on houses which crashed -29% in May, worse than the -18.1% in April, or just the collapse of end demand in China? Or maybe it was all just the sudden realization that European banks have a multi-trillion capital shortfall and are desperate to telegraph a European "all clear." It is unclear - but whatever the reason behind this very believable print, congrats Europe (wink wink).

After all who needs China when you have French manufacturing, or whatever part of its hasn't been bailed out through state nationalization.

End result: the horror of China's economic contraction, not to mention the miss in Japanese exports and imports from last night are both long forgotten, and Europe can now lead the charge to glorious socialist groath.

The overnight headline news bulletin from Bloomberg:

• Treasuries fall as week’s auctions continue with $35b 5Y notes, draw 1.375% in WI trading; drew 1.484% at June sale, highest in almost two years.
• China’s manufacturing weakened more than estimated in July, with a reading of 47.7 for HSBC/Markit’s purchasing managers index, est. 48.2
• Euro-area manufacturing unexpectedly expanded in July for the first time in two years, with Markit’s manufacturing gauge rising to 50.1 from 48.8 in June, median estimate 49.1
• Europe’s biggest banks, which more than doubled their highest-quality capital to $1t since 2007 to meet tougher rules, may have further to go as regulators scrutinize how lenders judge the riskiness of their assets
• ECB said euro-area banks loosened credit standards for loans to consumers for the first time since the end of 2007
• House Speaker John Boehner signaled a clash with the White  House and the Democratic-led Senate over raising the U.S. borrowing authority later this year.
• Sovereign yields mostly higher. Nikkei -0.3%, Asian stocks mixed, European indexes rise. U.S. stock indexes futures mixed. WTI crude, gold, copper fall

WHAT TO WATCH:

Economic Data

• 7:00am: MBA Mortgage Applications, July 19 (prior -2.6%)
• 8:58am: Markit U.S. PMI Preliminary, July, est. 52.6
• 10:00am: New Home Sales, June, est. 484k (prior 476k)

  New Home Sales M/m, June, est. 1.7% (prior 2.1%) Supply

• 11:00am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
• 1:00pm: U.S. to sell $35b 5Y notes

Summarizing the remaining key overnight news with RanSquawk

• Weak data from China was outweighed by an unexpected surge in manufacturing & services confidence in Germany and France.
• Apple's German listed shares traded up over 2% this morning after the company reported Q3 earnings after the closing bell on Wall Street yesterday.
• The next Greek aid tranche payment has been delayed and Greece is yet to confirm 5 of 22 measures, according to the German finance ministry.

Market Re-Cap

Yet another release of less than impressive macroeconomic data from China overnight was outweighed by an unexpected surge in manufacturing and services confidence in Germany and France, which in turn ensured that the risk on sentiment prevailed right from the get go. As a result, EUR was supported across the board and the 1y/1y EONIA forward rate rose to its highest since 4th July, the very same day that the ECB announced forward guidance, at the same time, shorted-dated EUR/USD implied vols were better bid, which indicates that the pair may be somewhat overvalued. The risk on sentiment, which saw Bunds trend lower and back above 1.6% yield level, was also supported by solid earnings report release by Apple, which lifted the tech sector in Europe.

Looking elsewhere, USD/JPY trended higher and above the key 100.00 level, supported by a firmer 1y USD OIS forward, which rose to its highest level since 17th July (day 1 of Bernanke’s semi-annual testimony). Going forward, market participants will get to digest earnings report releases from Boeing, Caterpillar, Facebook, as well as the weekly DoE report.

Asian Headlines

Chinese HSBC Flash Manufacturing PMI (Jul) M/M 47.7 vs. Exp. 48.3 (Prev. 48.3); 11-month low. Employment sub-index printed at a 52-month low of 47.3.

China Q4 economic growth may be less than 7%, according to NDRC researcher Wang Jian.

EU & UK Headlines

Eurozone Manufacturing PMI (Jul) M/M 50.1 vs. Exp. 49.1 (Prev. 48.8)
Eurozone Services PMI (Jul) M/M 49.6 vs. Exp. 48.7 (Prev. 48.3)
German Manufacturing PMI (Jul) M/M 50.3 vs. Exp. 49.2 (Prev. 48.6)
German Services PMI (Jul) M/M 52.5 Exp. 50.8 (Prev. 50.4)
French Services PMI (Jul) M/M 48.3 vs. Exp. 47.6 (Prev. 47.2) - 11 month high
French Manufacturing PMI (Jul) M/M 49.8 vs. Exp. 48.8 (Prev. 48.4) - 17 month high

The head of the German based DIW institute says that the ECB would be forced to consider buying shares or ABS if Germany's Constitutional Court ruled against the legality of the ECB's OMT.

The next Greek aid tranche payment has been delayed and Greece is yet to confirm 5 of 22 measures, according to the German finance ministry.

EU commission will discuss progress on the Greek programme on July 24th and that the IMF plans to discuss the Greece aid payment on July 29th.

Barclays prelim month-end extensions for Pan Euro agg. at +0.11yrs
Barclays prelim month-end extensions for UK at +0.04yrs

US Headlines

The FDIC and Federal Reserve may loosen mortgage rules in order to spur the real estate market, according to unidentified sources. The FDIC and Fed may adjust the Dodd-Frank rule that banks should retain 5% of all MBS issued without government backing.

Equities

Yet another release of less than impressive macroeconomic data from China overnight was outweighed by an unexpected surge in manufacturing and services confidence in Germany and France, which in turn ensured that the risk on sentiment prevailed right from the get go. The risk on sentiment was also supported by solid earnings report release by Apple, which lifted the tech sector in Europe.

Apple's German listed shares traded up over 2% this morning after the company reported Q3 EPS USD 7.47 vs. Exp. USD 7.31 and Q3 rev. USD 35.32bln vs. Exp. USD 35.04bln after the closing bell on Wall Street yesterday.

FX

EUR was supported across the board and the 1y/1y EONIA forward rate rose to its highest since 4th July, the very same day that the ECB announced forward guidance, at the same time, shorted-dated EUR/USD implied vols were better bid, which indicates that the pair may be somewhat overvalued.

USD/JPY trended higher and above the key 100.00 level, supported by a firmer 1y USD OIS forward, which rose to its highest level since 17th July (day 1 of Bernanke’s semi-annual testimony). On the other hand, widening credit spreads following the release of sub-50 China HSBC PMI data (iTraxx Australia +3bps), as well as reports that China industry ministry is to increase controls over industries with overcapacity (steel, aluminium, cement) weighed on AUD/USD, with supports seen at the 21DMA line at 0.9175.

Commodities

API US Crude Oil Inventories (July 23) W/W -1440K vs. Prev. -2600K
- Cushing Crude Inventory (July 23) W/W -2100K vs. Prev. -880K
- Gasoline Inventories (July 23) W/W -889K vs. Prev. 2600K
- Distillate Inventory (July 23) W/W -710K vs. Prev. 3800K

Chevron plans to gain prominence in Eastern Europe by using shale drilling methods to tap the region's natural gas resources. This comes after ExxonMobil scrapped their fracking efforts in Poland due to government delays and dry wells.

An Egyptian official says the country has delayed repairing the damaged pipeline that transports natural gas to Jordan. This follows reports that a section of the pipeline in the Sinai region was blown up yesterday.

China industry ministry said it will increase controls over industries with overcapacity. The ministry is to push restructuring and mergers in steel, aluminium, cement and other sectors. There were also reports that China banned the construction of government buildings for 5 years as part of an ongoing frugality campaign.

Gold supply from recycled materials may fall by as much as 25% this year as lower prices deter holders from selling the metal at a time when physical demand is strengthening, according to the World Gold Council.

* * *

In conclusion, a full narrative of the past day from DB's Jim Reid:

While we’re watching the PMIs, we should highlight that today is also a big day on the earnings calendar. The focus has been on the US reporting season, but we should also note that the Japanese reporting season kicks into gear today and European results will begin ramping up from tomorrow. For Japan in particular, it will be important to see whether the sharp rise in the Nikkei, depreciation in yen and unprecedented BoJ stimulus has been backed up by a rise in Japanese corporate profitability over the last quarter. In the US, almost 50 S&P500 companies, ie around 10% of index, will be reporting today.

In terms of yesterday’s earnings performance, we saw 71% beat EPS estimates and around 62% beat revenue estimates out of the 35  S&P500 companies that reported. These percentages are roughly consistent with what we’ve been seeing so far this earnings season. The most notable earnings report came from Apple who handily beat expectations with Q3 EPS of $7.47 (vs $7.30 expected) and revenues of $35.3bn (vs $35.0bn expected). Earnings expectations have come down sharply since Apple last reported earnings, but yesterday’s earnings beat did help its shares trade more than 4% higher in after hours trading. A somewhat consistent theme to have emerged in the results of corporate America thus far is the drag on earnings from China. On this note, Apple said yesterday that revenues from the  Greater China region were down 43% qoq and 14% yoy. The company joins other companies such as Coca-Cola and McDonalds to report weaker Chinese momentum.

Yesterday also saw the return of the US debt ceiling debate which seemed to drag on the Stoxx600 (-0.3%) towards the end of the European session and the S&P500 (-0.2%) at the start of the US trading day. While House Speaker John Boehner warned that “(Republicans) are not going to raise the debt ceiling without real cuts in spending”. President Obama and Senate leaders responded by saying that they wouldn’t accept anything short of a clean debtlimit increase. Yesterday’s comments look like they were the opening shots of a debt ceiling debate that has been on the backburner over the past several months. But the issue looks set to garner more attention over the remaining weeks of summer and into the autumn. The general consensus appears to be that the US will need an increase in the debt limit sometime between September and November after the breathing room from previous “emergency measures” is exhausted.

Turning to the day ahead, the immediate market focus will be on the European PMIs. Attention will then turn to what will be a big day on  the corporate earnings calendar. A number of industrial and macro bellwethers such as Ford, Boeing and Caterpillar, to name a few, will all be reporting before the opening bell. On the data front, US new home sales and French jobseeker data are the  main data reports outside the all-important PMIs.

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