European shares have opened higher on Friday. That follows a mixed session overnight in Asia where shares traded higher outside of China. Futures also point to a stronger open on Wall Street. The euro gave up early gains while oil prices are stable after two big days of gains.
Christine Lagarde speech
Maybe we missed some big clue here, but it seems Christine Lagarde hedged her bets in her maiden speech. The big announcement was that Lagarde will begin a strategic review into ECB policy. There was a lot of emphasis on the need for government-led investment, something Lagarde called for as Head of the IMF. We sympathise with the modest rise in the euro during the speech.
The specifics on monetary policy have been delayed until the strategic review and maybe the emphasis on fiscal policy can be interpreted as less monetary stimulus ahead. We would welcome it if she took a stand against the rising risk to financial stability from more extraordinary monetary policy. Lagarde could use the review to set the stage for a big policy stand-off with Brussels and Berlin – but presumably she won’t. She hasn’t said it today, but if Lagarde were Trump, she would call herself a low rates gal.
Eurozone PMIs
PMIs across France, Germany and the Eurozone almost universally missed expectations on Friday. The numbers deepen concerns over growth in the region. The longer the PMIs languish at these levels the lesser the prospects for a 2020 rebound. There is a mismatch between the expectations of purchasing managers and investors. That for us us is a gaping hole in the middle of the huge gains in European stock indices this year.
Soft PMIs across the Eurozone completely unravelled, and then some, the gains made by the euro during Christine Lagarde’s speech. The one highlight was a bigger than expected pickup in German manufacturing. It was German manufacturing that led Europe into its latest malaise via the troubled in the auto sector and slowing global trade. This might be the first inkling of German manufacturing leading the rebound.
Oil price sharp rebound
We’ve been quite struck by the resurgence in oil prices over the past two days. WTI crude oil futures are back near 2-month highs. It has been interesting to see oil prices gain while other markets sensitive to the US-China trade war loose out.
We are interpreting this pickup in oil prices as a refocus on supply-side issues in the lead up to the OPEC meeting in December. The price action implies more than we have seen in the news flow. Reports in recent days have suggested OPEC+ will extend its output cuts at its upcoming meeting. We think an extension was already priced in so markets might be positioning for deeper output cuts.