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Silver Linings in Global Market Clouds

Global stock markets have been wringing their hands and punishing risk takers the last few weeks. The driving concerns have been China and Europe -- two of the three pillars of the global economy -- were about to turn down.

The latest leading indicators out today made a more subtle case for an upturn in both.

Read on.

Purchasing Manager Indexes (PMIs) Ease Concern

PMIs have now come out to calibrate global weakness in both Europe and China.

On Tuesday, purchasing managers surveys (PMIs) showed the Eurozone composite manufacturing PMI was 50.3 month, versus a reading of 51.4 the month before. The Eurozone services PMI came in at 52.8, versus a reading of 53.1 the month before.

While the PMI trend was down, this does indicate the European expansion is ongoing. Once stock markets stabilize, that idea should give bulls solace. Combine an expanding European economy with attractive valuations. The contrarian play is to buy Europe now.

For France, the manufacturing PMI came in at 48.8 versus a prior reading of 46.9. That is headed in the right direction. The French services PMI came in at 49.4 versus a prior reading of 50.3. That means mixed news for France. It also shows the positive signs of a weak euro on the French manufacturing sector.

Also out was French GDP. It met expectations for a 0.0% GDP growth rate. Tie those two together. The PMI is a leading indicator, GDP is a lagging indicator. The French sideways state of affairs looks to remain in train towards the end of the year. The issue will be if the market already priced that in, and is now looking out on growth in 2015.

For Germany, the manufacturing PMI came out at 50.3, versus a prior reading of 51.4. The services PMI came out at a hot 55.4, versus a prior reading of 54.9. Again, that is not newsworthy of a deep sell-off in German stocks.

The HSBC/Markit flash PMI for China came out on Tuesday as well. The prior reading was 50.2. This month showed a higher 50.5 reading. That is unambiguous good news. With two Chinese monetary stimulus measures announced last week, this PMI number could have been a downer. It surprised to the upside.

Takeaways from Tuesday’s PMI Data --

The Eurozone is still growing, despite the negative headlines from Draghi’s easing. China is also still growing, despite the negative headlines concerning China’s easing. The reality is that both sets of policy authorities are attempting to light a bigger fire under the modest growth.

That should ultimately be appreciated by financial markets. When is inevitably the major investor query. Bargain hunters usually surge into global markets at the same time. My guess is a surge of bargain hunting will happen shortly.

European bond yields are near record lows. Yields didn’t move much on the latest PMI news. Bond traders have already priced in all the negatives, which is a positive.

On Friday, the trading week concludes with the final estimate for U.S. GDP on Q2. Consensus expects the +4.2% report for Q2 to be raised to +4.6%.

U.S. and Arab Allies Announce the Onset of ISIL Air Strikes

We also got news of a tightly coordinated air attack on ISIL bases inside Syria. Saudi Arabia, Qatar, Jordan, the U.A.E. and Bahrain contributed aircraft to a U.S.-led strike on Syrian bases of the terrorist group ISIL.

The FT attributed the following quotes to General Martin Dempsey, the U.S. Chairman of the Joint Chiefs of Staff:

“We wanted to make sure that ISIL knew they have no safe haven, and we certainly achieved that,” the Associated Press quoted him as saying. He said the partnership with the Arab states came together over the past three days.

“Once we had one of them on board, the others followed quickly thereafter. We now have a kind of credible campaign against ISIL that includes a coalition of partners.”

My guess is NATO air support will follow. The tactical point was to make initial air strikes come from neighboring Arab states. That’s smart. Clearly, these Arab states can also train the ‘boots on the ground’ needed to finish the job, or send their own troops in jointly with Iraqi forces, working alongside trained Syrian moderates. I would expect the rest of a very coordinated NATO-Arab strategy to be unfurled in coming days.

This is not good news for the Damascus government, for ISIL or for Russia, which supports the Damascus government. In turn, this is good news for the global markets.

Conclusions

Here are four conclusions based on the latest facts:

  1. A strong U.S.

  2. A modestly expanding Eurozone, with added stimulus in train.

  3. A modestly expanding China, with added stimulus in train.

  4. A more active U.S. military acting in concert with Arab allies.

That doesn’t sound terrible does it? The next thing to watch is global markets climbing the wall of worry.


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