Ranko Berich (Monex Europe) | Despite continued increases in coronavirus cases globally, the re-opening of major economies in June has caused a significant improvement in market risk appetite, and this morning’s better-than-expected PMIs are likely to see a further extension of this trend.
The fact that the UK composite PMI had a reading below 50 means that on balance, respondents reported a continued contraction – which seems a bit puzzling given the economy began to re-open slowly in June. Although IHS Markit Chief Economist Chris Williamson has said that there is no evidence that companies are reporting anything other than simple month-on-month comparisons, it seems at least plausible that the surveys are understating the actual month-on-month change in GDP. As diffusion indices, PMIs have well-known drawbacks in circumstances where businesses are experiencing rapid changes in circumstances and high uncertainty. Straight inferences about monthly GDP should not be made based off the surveys in these circumstances anyway.
As fascinating as the PMI debate may be for finance Twitter, the finer points of the surveys are beside the point right now for markets. What matters is that businesses in the UK and Europe have reported that sentiment has improved. For now, this is likely to be enough to support risk appetite and allow the pound and euro to continue to recover lost ground.
(European markets have opened higher this morning following some upbeat PMI data. Readings above 50 indicate growth and while the readings for Germany stopped just short, France’s numbers cleared that important level. France’s CAC 40 is up 1.6%, the UK benchmark FTSE 100 is up 0.8% but leading the way is the German Dax up over 2%).