Pain but no gain

Equity markets started the month of June as they ended the month of May, creeping higher. The start of the month is dominated by the results of Markitt’s Purchasing Manager Surveys. China’s eagerly watched manufacturing survey came in at 50.8 slightly above expectations of 50.7. A reading above 50, as we often point out, indicates an expanding economy, below 50 a contracting economy. The UK manufacturing data came in at 57, slightly below last months 57.3 but in line with expectations.

As investors prepare themselves for the ECB announcements on Thursday, if any more ammunition was needed to encourage the ECB to act, Monday’s data should have provided it. May’s final PMI manufacturing report for the eurozone was revised down from 52.5 to 52.2, below April’s report of 53.4. Today we get inflation data for the eurozone as a whole, on Monday Germany released May’s month-on-month CPI showing a fall of 0.1%, with the year-on-year figure coming in below expectations at 0.9%. The euro continued to fall against the US dollar, trading at the end of Monday below $1.36. 

Economic growth in the euro area stalled in the first quarter to an annualized rate of just above zero. Banks look to raise capital ahead of the results of the stress tests, and in all likelihood the inflation data due out later in the day will show the eurozone economy creeping closer to outright deflation. Much will be expected by markets from the ECB to address the position on Thursday. Mr. Draghi has a sliver tongue and has calmed markets before with his words. Thursday will need a few deeds as well. Having left it late to act, a stronger dose of medicine is probably required to truly address the position than the ECB will be prepared to administer at this point, but we shall see. 

Despite the expectation of action on Thursday by the ECB, and if day traders are a window on the wider investment mind-set, at present there is no sign of capitulation to the equity rally. The trading platforms continue to show traders running short positions on all the major developed markets. Traders love mean reversion trades, in contrast to the short index positions, traders are running long positions in gold which had another poor day, now trading below $1250 an ounce. Long gold, short equity is pain with no gain, at least for now.

Posted on June 3, 2014 .