European markets higher as manufacturing PMIs show signs of improvement

• Chinese stimulus drives Hang Seng surge
• European PMI surveys on the rise
• Bank of Canada rate decision due

European indices are on the front foot in early trade, led by the German DAX in the wake of a welcome rebound for their manufacturing sector PMI. With the S&P 500 pushing into fresh record territory, and a Chinese bounce back that saw the Hang Seng gain over 3.5%, it comes as little surprise to see that if momentum carry through in Europe thus far. This week has seen the Chinese fight back after a prolonged period of underperformance for equities in the region. Yesterday’s rumours of a CN¥2 trillion war chest have been followed up by a surprise reserve requirement ratio rate cut from the PBOC, leading the Hang Seng into its best day for two-months.

This morning has seen a raft of PMI surveys out of Europe, with both the pound and euro heading sharply higher after both regions saw their growth prospects improve via composite PMI gains. The hard-hit manufacturing sector has clearly made headway over the beginning of the year, with the German manufacturing PMI enjoying its best monthly rise in almost three-years. However, the eurozone growth picture remains troublesome, with January marking the eight consecutive contraction reading for the wider composite gauge for the region.

The UK economy remains in relatively rude health, thanks in part to the reliance on the services sector which continues to drive positive growth for the country despite 18 consecutive sub-50 manufacturing PMI readings. Rather concerningly, we have started to see firms impacted by the shipping crisis in the Red Sea, with companies suffering higher input prices and a sharp rise in supplier delivery times. The question for markets remains whether this will translate into a fresh bout of inflationary pressures for businesses to pass on.

Looking ahead, the Bank of Canada seek to maintain the central bank theme. Markets expect little by way of action on the policy front, but guidance will be needed given the rapid disinflation that looks likely over the coming months. Nonetheless, CAD sentiment appears to be heavily driven by energy markets, and thus a break through $76 for WTI could be equally important for the Loonie.