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Ad Hoc Commentary

Tuesday June 5th 2012

Tuesday, June 5th 2012
This Tuesday morning is seeing an initial improvement in European equities so altering the path of the last 4 sessions. Hardly the parting of a "Red Sea" as early gains are evapourating, but once again there is speculation that global policy action will be coordinated to enliven the global growth prospects.
This is a welcome break in the mood of economic exhaustion as a key European equity gauge, the Stoxx 600 has still retreated a mighty 14% since it peaked on March 16th. In Europe the future of the Euro Zone has been an ever present as fears run high over the unintended consequences of a Greek withdrawal from the single currency.
Policy Parler:
Today there will be a  a conference call between Ministers of Finance  and Central Bank governors from the G-7 countries to discuss the Euro Zone’s sovereign-debt crisis. In the hope that "something" (but what?) will be done we see the CAC 40 +0.24%, FTSE MIB +0.07% and the IBEX +0.27%...however, the DAX is lower by 0.95%, to know why...look at the PMI figures plus the Germans know who will have to pay the largest share of the stimulus!
Across the Euro Zone one can see that all of the major economies are in a greater or lesser degree of retrenchment as the business surveys on PMI suggested even mighty Germany is no longer immune to the danger that is building within Greece and Spain.

Tuesday's purchasing managers indexes (PMIs) showed the Euro Zone's private sector contracted in May at the fastest pace in almost 3 years, with comporate order books collapsing.

Markit's Euro Zone Composite PMI fell to 46.0 in May from April's 46.7; th lowest reading since June 2009 and spending its 4th month below  50, the point that divides growth and contraction. The Italian PMI was just 42.8, the French 45.1 and although Germany was above 50 at 51.8 it was below the expected level of 52.2. Does this indicate that the boiler room that has powered the Euro Zone through the storm tossed economic sea and so avoided the sirens that call from the recessionary rocks is beginning to splutter and choke?

We should be worried as the PMI data points have an exemplary track record of gauging economic growth. Raw data speaks the truth not the hopes and wishes that have been expressed by the ECB President Mario Draghi who has repeatedly stated that he expects a recovery gradually over the course of the year.
One has to conclude that Italy is in the worst place as the PMI is pointing to Q2 GDP coming in at -1% at best. However, it is more than likely that bedeviled Spain will see -0.75% and President Hollande will have a GDP headache of -0.5% to address ASAP.

The issue of exhaustion is even further emphasised as Euro Zone Retail Sales numbers are shocking and should surely undermine the Euro even more.
For April on a Y/Y basis the reading is -2.5% when -1.1% was forecast and the measure was -0.2% in March. At the M/M basis the results are equally dire...-1.0% compared to a forecast of -0.1% and 0.3% in March.
Whilst we respect that the ECB want more to be done from the political policy centre surely one offshoot from today's conference call is for Thursdays meeting to clearly pave the way for the US Fed to progress QE3...the UK to also add more accommodation...
...but most crucially for the ECB to not "Draghi" its feet... to cut rates from 1.0% to 0.75% and to act now and activate QE without waiting for the politicians to assemble in June.

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