By Ulf Bergman
As China forges ahead with its economic recovery, Europe appears to be on the second leg down in what could turn out to be a W-shaped recovery. The results of IHS Markit’s survey of purchasing managers across the Eurozone indicate that the 19-members bloc is slipping back into contraction. Hardly surprising, the service sector is leading the plunge, as restaurants and other parts of the hospitality industry have been forced to close in many countries. The extent of the weakness in the service sector pushed the overall PMI into contraction territory, despite the manufacturing industry recording growth for the fifth consecutive month. The severity of the contraction is not of the same magnitude as in the earlier parts of the year, but if the weakness continues into the new year, parts of Europe may find themselves in a double-dip recession.
The rollout of vaccinations across the continent is clearly a key to the recovery of the European service sector and any delays would risk a protracted recovery. However, the resilience of the industrial production, especially in Germany, is maintaining the continent’s demand for commodities, which is also likely to increase as stimulus programs will take effect from next month.
Unlike its Eurozone equivalent, the US composite PMI recorded its strongest readings since 2014, with both manufacturing and services in expansionary territory. A post-election lift of confidence in combination with positive news flow on vaccines have injected some optimism, with positive signals for employment and industrial production. Increasing infection rates and the expiry of several of the Federal Reserve’s emergency lending programmers in December could potentially see the confidence sailing into headwinds in the weeks ahead.
The importance of vaccines for the global economic recovery can obviously not be overstated and any meaningful recovery can be expected to be directly correlated with the speed and success of vaccination efforts. However, with three potential vaccine projects (and counting) looking to seek regulatory approval, global investors are increasingly optimistic about the future. The last few days have seen oil and equities advancing, as investors see a return to more normal business conditions in the not too distant future and with declining risk aversion as a result. With a greater appetite for risks among investors, the US Dollar have weakened to some of the lowest levels in the past 12 months, as investors require less of safe haven assets such as US Treasuries.
US Dollar - 12 months
A weaker US currency is good news for commodity importers around the world, most notably China, as most contracts are priced in US dollars. The strong performance of the Chinese economy during the second half of the year have driven commodity demand and prices higher, but with a weaker greenback the impact could be muted somewhat. The effect could also be an increase in demand for commodities, with even greater volumes being shipped around the world, and prices (in US dollars) reaching even higher levels.