Europe: France and Germany face the economic challenges. Both countries are experiencing a contraction in business activity, with the French economy recording a steep contraction since June and the German economy showing signs of weakness. The composite PMI index for both countries shows a serious economic contraction, in the case of France, its manufacturing activity falls to 43.2, and in the case of Germany, the figure reaches 45.4. The euro area in January was 47.9, just below the 50 level that marks expansion, indicating a weak start to the year. While there was a slight improvement in manufacturing, the services sector performed below expectations.
Paradoxically, the European stock market, especially the German one, rises strongly during today’s session, DAX40 is trading above 16800 points and seems to be heading towards its historical highs in the area of 17,000 points. Additionally, The German 10-year yield fell 6 basis points to 2.30%, and the equivalent French yield posted a similar move to 2.79%. The euro also seems to be strengthening in recent hours, with the EURUSD reaching levels close to 1.09. However, with two powerful moving averages of 55 and 200 periods at H4 charts, making resistances at nearby levels above.
Once again I ask the question: what investment criteria is buying stocks from economies that are in full economic contraction? What performance and dividends are expected from these companies, considering the economic sentiment in their region? Something is not working in this current scenario, we could be witnessing an artificially inflated market by strong hands.
Keep an eye on the European market in any case, as tomorrow we will have the European Central Bank’s rate decision and Christine Lagarde’s speech, which will undoubtedly generate market volatility.
China: A few days ago we pointed out the divergence between the Chinese and Western stock markets, some at 2-year lows and the others at record highs.
Well, Hong Kong’s Hang Seng index, just as it was approaching its 2022 lows, has risen more than 1% on the announcement, after the announcement in some media of state aid, with rumors and a possible stabilization fund, which would reach the figure of 2 trillion CNY, the equivalent of more than 278 billion dollars. The mainland China index, Shanghai Composite, has also had a strong upward rebound from areas of lows.
On the other hand, this movement in China’s stock markets could also be motivated by the central bank’s announcement.
The People’s Bank of China (PBOC) will reduce the reserve requirement ratio (RRR) for banks by 50 basis points from February 5. This move is expected to release 1 trillion yuan in long-term capital to support economic growth. The PBOC governor, Pan Gongsheng, also mentioned that there is room for further monetary policy easing. The RRR cut is part of the central bank’s efforts to increase the capacity for lenders to support the economy. This decision comes in the context of China’s modest economic rebound and the need for targeted growth support while addressing challenges in the real estate sector.
There are also some macroeconomic data from Asia that would point to an improvement in the regional economy. We have recently known the increase in Japan’s exports, which went from a negative balance in November to a strong positive rebound in December of 9.8% YoY, in particular with an increase in exports to China that had not occurred for 13 months, which could indicate greater economic activity on the part of China.
Even South Korea’s economy, also highly linked to China, experienced an unexpected improvement in consumer confidence for the second consecutive month, rising to 101.6. In addition, inflation expectations fell to 3% from 3.2 in December, easing potential interest rate pressures in the country.