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Investing.com — Europe’s stock markets rallied on Tuesday morning on two separate factors, neither of which was particularly convincing.
By 5:30 AM ET (0930 GMT), the benchmark Stoxx 600 index was up 1.2% at 366.96, having earlier hit a two-week high. The German DAX index was up 1.9%, while the Spanish IBEX and Italian FTSE MIB were both up 1.5%.
The move was mostly due to a much sharper-than-expected rebound in IHS Markit’s purchasing managers indexes for June, with France’s index conspicuously popping back above the 50 level that traditionally separates growth from contraction.
The composite eurozone PMI hit a four-month high of 47.5, up from 31.9 in May and a record low below 14 in April, at the depths of the pandemic-driven lockdowns. The manufacturing index rebounded to 48.2 from 35.6, while the services index rose to 47.3 from 30.5.
However, the trouble with the PMIs is that they are diffusion indexes. That is, they aggregate multiple indicators by asking whether they are trending upward or downward, but they ignore the extent of the movement. As such, they are generally better at indicating turning points in trends than absolute levels of activity.
“Today’s PMIs for June are almost entirely worthless,” said Panmure Gordon chief economist Simon French, via Twitter. “Not a criticism of the data providers – simply that in such unprecedented circumstances any calibration across to output levels is impossible. The data is good for headlines and pretty charts – little else.”
IHS Markit did its best to put the numbers in context. The bottom line is that the eurozone economy is still contracting. IHS noted that jobs were cut and output and prices fell, even if at a much slower pace than before. After virtually every country in Europe lifted its lockdown measures at least partially in May, this relative improvement can’t come as any surprise.
“While the recovery may start in the third quarter, momentum could soon fade meaning it will likely take up to three years before the euro zone regains its pre-pandemic level of GDP,” IHS Markit’s chief economist Chris Williamson said.
But in one regard at least, the indexes do provide a valuable test of sentiment. IHS noted that optimists outnumbered pessimists for the first time since the Covid-19 outbreak began, with an unignorably large majority of respondents expecting output to increase in future.
The trajectory for the economy may not be great, but it is at least comprehensible.
That’s more than can be said for the second factor behind Tuesday’s upward move, namely, relief that the U.S. administration still wants to maintain the fiction of the ‘phase 1’ trade deal with China. White House trade advisor Peter Navarro told Fox News late on Monday that the deal was ‘over’, as China has not approached the level of purchases of U.S. products that it committed to before the pandemic. President Donald Trump himself had to take to Twitter to correct his advisor, saying the deal was still intact. Most analysts saw the intervention as purely tactical.
“The trade deal is most at risk in September and October,” said Paul Donovan, chief economist with UBS Wealth Management in a morning podcast. “If U.S. President Trump imposed trade taxes then, the damage to U.S. companies and consumers would be felt after the election.”
