PMI Indices in the Eurozone and Emerging Markets: which direction for the markets?


The final reading of April’s euro-area composite PMI survey suggests the economic expansion continued at the start of the Q2 at a similar pace as in the Q1. That’s largely in line with other surveys.

Nonetheless, a rise in inflationary pressure remains elusive. The country breakdown suggests the recovery is most elusive in France. The deflationary forces are well around the corners and the investors need to take account of them.

The final headline reading for April was unrevised at 53. That compares with a quarterly average of 53.2 for first three months of the year, a decline that’s too small to indicate much of a shift in GDP growth.

Markit estimates that each point of the index compiled for the countries adds or subtracts almost 0.12 percentage point from the quarterly growth rate, fixing the break-even level at 50. That means the reading for April is consistent with a quarterly growth rate of 0.3 percent.

However, the survey indicated the same thing about the first quarter and GDP growth came in at double that pace.

The European Commission’s economic sentiment indicator and the current assessment component of the German IFO survey also suggest that the Euroarea economy continued to expand in April at a speed similar to that of the Q1.

The German ZEW survey, which is probably the least reliable of them all, revealed only a small drop in April from the average for the first three months of the year.

The most important details of the PMI were mixed. New orders — the forward looking component — pointed to a path of steady growth ahead. The figure on output prices was lower than its average for the first quarter, but not significantly so, and it is still largely range bound.

The country breakdown suggests that growth remained steady throughout the largest economies of the Eurozone. Although, the numbers for Germany moved more than any other — its headline reading dropped 0.6 point in April from its Q1 average.

The main numbers suggest Spain is growing at the fastest pace and France at the slowest among the four largest economies of the Eurozone; these readings are consistent with the analysis of an output gap across countries in the region (closing quickly in Spain and persisting in France).

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Figure 1: Eurozone PMIs Indices [Spain, France, Italy and Germany]

But look at what happens when we normalize the data:


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Figure 2: Eurozone PMIs Indices [Spain, France, Italy, Germany] (normalised at 100)

But what happened in the rest of the economies of the world?

Rising oil prices seem to have driven the bounce in EM equities this year. Within the BRICs, Russia and Brazil outperformed apart underlying weaknesses in their economies.

Some big investors think that oil prices will resume their decline and favour equities in economies that are consumers of oil, such as China and India.

The most surprising thing in the past weeks was the surprise put in place by the Bank of Japan who kept its monetary policy unchanged. Investors seemed to want more, even though the BOJ has pumped over 70% of GDP into the economy since 2010 and is already a top 10 shareholder in about 90% of the Nikkei 225 through its ETF purchases.

Expectations of policy change in Japan or from the Federal Reserve are far far away. The first estimate of Q1 GDP in the USA on Thursday showed slower growth in Q1, but confirmed the pickup in core inflation, which puts the Fed in a dilemma. Now financials operators are betting between a single hike and a double hike before the year end.

These more dovish expectations might be reflected in the continued weakening of the USD. A stronger oil might be the main factor behind the strong returns from Emerging Market equities this year. They have been the best performing region within equities in both local currency and in UD.

Figure 3 appears to confirm this views. When we look at the 4 BRIC countries (Brazil, Russia, India and China) as an example, we are facing the oil producers have gained benefits, while oil consumers have lagged. There seems to be a reasonable correlation between oil prices and the performance of Brazil and Russia.

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Figure 3: BRICs Stock Indices & WTI price

The difference in returns from oil-producing countries shows up in currency markets, too. The BRL and the RUB have strengthened by 13-15% against the USD year-to-date, while the INR and the CHY have been broadly flat.

The strong returns from Brazil and Russia are even more unexpected in light of how the real economy is doing. Investors use the manufacturing PMIs as a timely indicator of economic activity. The basic idea behind these indices is that they signal expansion in the manufacturing sector when the values are above 50 and contraction when they are below.

We also find them useful leading indicators to growth in the whole economy, and on this measure, India and China look stronger than Brazil and Russia.

Brazil’s index has been below 50 since February 2015 and has not shown any improvement this year. In Russia, it has been deteriorating since December last year. By contrast, the Chinese PMI bottomed out in September 2015 and the Indian index has been picking up this year.

In this environment, investors should expect equities to underperform in Brazil and Russia, and outperform in India and China. Fixed income markets also appear to back this up. Government bonds tend to do better when the economy is weak, and yields have indeed been falling in Brazil and Russia year-to-date.

Sovereign yields have been rising in China, which is consistent with a strengthening economy. The odd one out is India, where yields have fallen in 2016, although in line with easing by the Reserve Bank of India.

Although valuations are supportive, dividends should decline and investors should be careful and look for better opportunities elsewhere. Total returns of almost 2% should be underway in the next 12 months in local currency terms and FX markets anticipate further currency depreciation.

Investors remain convinced that the super-cycle of the oil is still deflating and we are yet to see a bottom in prices until they drop below the cost of production.

In light of this, the outperformance of Brazilian and Russian equities will be short-lived. Hard currency sovereign debt should be preferred on these markets. However, if oil prices keep rising, strengthening currencies would boost positive returns from their equity markets.

Investor should prefer within Emerging Market equities the corporations that are definitely oil consumers. Investors should focus positively on China and Indian equities that should benefit both from an expanding economy and a loosening central bank.

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Figure 4: BRICs PMI Indices

Cristian Rusconi



  • 10th May: NFIB Small Business Optimism
  • 10th May: Wholesale Inventories MoM & Wholesale Trade Sales MoM
  • 11th May: MBA Mortgage Applications
  • 11th May: US Crude Oil Inventories
  • 12th May: Initial & Continuing Jobless Claims
  • 12th May: Bloomberg Consumer Comfort
  • 13th May: Retail Sales Advance MoM
  • 13th May: PPI Final Demand
  • 13th May: University of Michigan Sentiment
  • 16th May: Empire Manufacturing
  • 16th May: NAHB Housing Market Index
  • 17th May: Housing Starts & Building Permits
  • 17th May: CPI MoM & YoY
  • 17th May: Industrial Production & Capacity Utilization
  • 18th May: MBA Mortgage Applications
  • 19th May: Chicago FED Nat Activity Index
  • 19th May: Philadelphia FED Business Outlook
  • 19th May: Leading Index
  • 20th May: Existing Home Sales


  • 10th May: Industrial Production SA & WDA [GER & FRA & ITA]
  • 10th May: Trade Balance & Current Account Balance [GER]
  • 10th May: Exports & Imports SA MoM [GER]
  • 11th May: Industrial Production MoM & YoY [UK]
  • 11th May: Manufacturing Production MoM & YoY [UK]
  • 12th May: CPI MoM & YoY [FRA] & Industrial Production MoM & YoY [EZ]
  • 12th May: BoE Bank Rate [UK]
  • 13th May: CPI MoM & YoY [GER]
  • 13th May: GDP QoQ & YoY [EZ & GER & ITA]
  • 17th May: Trade Balance [ITA]
  • 17th May: CPI MoM & YoY [UK]
  • 17th May: PPI MoM & YoY [UK]
  • 18th May: CPI MoM & YoY [EZ]
  • 18th May: Jobless Claims [UK]
  • 19th May: Retail Sales [UK]
  • 20th May: PPI MoM & YoY [EZ]
  • 20th May: PPI MoM & YoY [EZ]

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