Global Manufacturing Expansion Prevails

Analisi Giornaliera - 02/04/2015

Manufacturing Indicators from Europe and America Hang on to Growth

Even though the global economy continues to contract in dollar terms, manufacturing indices from Europe and America continue to eke out growth in spite of the headwinds. Strong expansion from Europe and the UK are coming off the back of depreciation of local currencies versus the US dollar.

Manufacturing Mixed

Europe and the UK continue to benefit from the strength in the dollar which has caused local currencies to depreciate. The knock on effect for exports is evident with manufacturing indices improving in both regions month over month. Gains in the Euro Area were led by Italian manufacturing which saw the PMI expand from 5.19 to 53.3. Germany also experienced growth, with the manufacturing PMI printing at 52.8 versus 52.4 in the prior period. While the official US manufacturing PMI managed to beat the prior figure, the ISM Manufacturing PMI fell, with the contraction in new orders a main source of concern. Today’s factory orders data will likely confirm the purchasing manager’s sentiment towards future growth expectations, with estimates of continued contraction. GBPUSD and EURUSD are ticking higher as dollar strength reverses amid worse than expected employment data.

ADP Points to Employment Reversal

Yesterday saw the biggest ADP nonfarm employment print miss in 4 years, with job gains at the weakest level since 2013 after showing 189,000 jobs added in March versus estimates of 225,000. Although the ADP nonfarm employment number is not necessarily a good benchmark for predicting nonfarm payrolls, it is useful in confirming the prevailing trend in employment data. Friday’s nonfarm payrolls will likely be revised below estimates of 245,000 jobs added during March with the weather blamed as the primary culprit. Today’s challenger job cuts will hopefully provide further indication of the pace of US employment growth and give more details about layoffs in the energy sector which is in the middle of a shift in the credit cycle as the industry undergoes contraction. Benchmark equity indices continued to trend lower as weaker earnings, revised guidance, and stalled buybacks weighed on valuations.

Commodities Gain on Dollar Softness

The resurgence of Greek exit fears and data disappointments leading to a dollar decline have sent commodities higher as investors look for haven assets to protect value. Greece has several large repayments coming due, the major one being the April 9^th payment to the IMF which has come under increased scrutiny. Even though Greece has issued new reforms to help unlock the next tranche of bailout funds, finding cash to secure near-term repayments remains a challenge. Some Greek politicians have warned that the repayment might be delayed which could trigger renewed default fears. The dollar softness after the employment disappointment has also added momentum to precious metals and energy which have surged higher. Gold is trading back above $1200 and oil looks poised to retest $50 per barrel on the raging conflict in Yemen and Pemex rig explosion in Mexico.

Silver Head & Shoulders Technical Pattern

The precipitous drop in the dollar due to weaker than forecast economic data points is seeing precious metals rally. Even though inflation remains weak and the case for owning precious metals is diminished, any further declines in the dollar are likely to be reflected directly via the strong inverse correlation to silver and gold prices. The head and shoulders technical pattern in Silver prices has a bullish bias even if it does not resemble traditionally defined patterns. Any move above the trendline that sets the shoulder line could see further gains in the precious metal as deterioration in economic fundamentals stokes dollar weakness. A move below the neckline should be treated as a breakdown in the pattern and reversal with resumption of the prevailing long-term downtrend.