European morning briefing

Stocks called higher; EUR/USD at 1.1194-97; bonds seen pressured; Brent at $65.29; gold at $1182.90

-China April HSBC Final Manufacturing PMI 48.9 Vs 49.6 in March

-IMF to Brighten View of China’s Yuan

-German Train Drivers to Strike Next Week

Watch for: Eurozone manufacturing PMIs; speeches by Fed’s Charles Evans and John Williams; no major European earnings scheduled, Comcast due in the U.S.

European Outlook:
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With the first quarter data almost complete, there have been some hopeful signs that the region’s economies are back on a growth path, led by the U.K. and Germany; but there are still deflationary pressures and many areas of vulnerability, fueling doubts over the sustainability of the expansion. Data out this week will help clarify the picture. And for good measure, there’s also the prospect of another cliffhanger U.K. election.

For Monday though, markets are likely to remain subdued with most of Europe returning from a 3-day break, while London is closed for the May Bank Holiday. Investors won’t have much to focus on with just the Markit final April manufacturing purchasing managers indexes scheduled. Numerous indicators have suggested the eurozone is coming out of its funk, if slowly. There needs to be more confirmation of that and these PMI data could help to achieve that. Overall, the flash PMIs from mid-April suggested modest growth but without acceleration.

China’s manufacturing sector in April turned in its weakest performance in a year, according to a private gauge of the country’s factory activity, suggesting that Beijing may need to speed up its efforts to boost the economy.

The private-sector HSBC manufacturing Purchasing Managers Index fell to a final reading of 48.9 in April from 49.6 in March, HSBC Holdings said Monday. It was the lowest level since April 2014 when the reading came in at 48.1–well below the 50 level that separates expansion from contraction.

“The economy hasn’t bottomed out yet,” said Larry Hu, an economist at Macquarie Securities. “There will be more stimulus measures.”

The reading also contrasted with the official manufacturing Purchasing Managers Index, which was released on Friday and came in at 50.1–in expansion territory and rising at the same rate as in March.

Analysts said the sharply different readings reflect the greater weighting given to smaller, export-led companies in the private survey. The official measure has a greater proportion of big state companies.

Stocks:
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European stock markets – many of which return from an extended break – are likely to open higher on Monday, boosted by Friday’s modest recovery on Wall Street, although the latest disappointing reading on China’s manufacturing will temper gains.

IG has called the DAX up 38 points at 11492 and the CAC up 14 at 5060. London’s FTSE is closed for a national holiday.

U.S. stocks rose Friday, bouncing back from the previous session’s steep declines.

Even with the day’s gains, stocks ended the week in the red, in large part due to Thursday’s sharp selloff. The latest hiccup for the equities market was sparked by mixed economic data that underscored worries about slowing U.S. economic growth, a common theme for 2015. The companies whose shares fell the most Thursday were those that had previously performed well, such as biotechnology and small-capitalization companies.

On Friday, the Dow Jones Industrial Average added 183.54 points, or 1%, to 18024.06. The S&P 500 index gained 22.78 points, or 1.1%, to 2108.29, and the Nasdaq Composite Index climbed 63.97 points, or 1.3%, to 5005.39.

China shares drifted lower Monday after the disappointing manufacturing PMI. The Hang Seng Index was down 0.1% at 28103.95 while the Shanghai Composite Index was off 1.2% at 4390.140. Tokyo was closed for a holiday.

Forex:
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EUR/USD is likely to consolidate in a lower range Monday after hitting a two-month high 1.1290 on Friday.

The pair undermined by a broadly firmer dollar undertone, with the ICE spot dollar index last at 95.29 versus 94.84 early Friday and the European Central Bank’s large-scale quantitative easing program.

The International Monetary Fund is close to declaring China’s yuan fairly valued for the first time in more than a decade, a milestone in the country’s efforts to open its economy that would blunt U.S. criticism of Beijing’s currency policy.

The fund’s reassessment of the yuan–set to be made official in IMF reports on China’s economy due out in the coming months–follows years of IMF censure of Beijing’s management of the currency.

At 0150 GMT, EUR/USD was at 1.1194-97.

Bonds:
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Some strategists believe the bond-buying program from the ECB may actually boost the eurozone’s anemic growth and stem deflation risks, which could sour appetites for haven bonds like Germany debt.

Data on Thursday showed consumer prices in the eurozone were steady in April after four months of declines. Private-sector lending was up 0.1% on an annual basis in the eurozone last month, the ECB said in its monthly report on April 29, the first rise since May 2012.

The ECB started its 60 billion euro-a-month bond-buying program in March and the program is scheduled to last through September 2016. The monetary stimulus has been a main driver sending bond yields in eurozone tumbling broadly to historic lows earlier this year.

“Everyone is talking about the improvement in European data,” said David Keeble, global head of interest-rates strategy at Crédit Agricole in New York. “No longer are people talking about expanding ECB’s [bond buying,] but when they might cut it back,” which has contributed to the selloff in German bonds and Treasury debt.

Germany’s bond markets were shut Friday for a public holiday.

Greece’s standoff with creditors has investors speculating once again about the impact of a default on its debt or the country’s exit from the euro. What it hasn’t done is spark much trading in Greek government bonds.

Only EUR2 million ($2.24 million) of Greek government bonds changed hands on the country’s HDAT electronic-trading platform in April, according to the latest data from the Bank of Greece. Last year, monthly volumes averaged EUR866 million. Not since the run-up to Greece’s 2012 default have volumes been so low.

Meanwhile, 18 global banks that are approved primary dealers–appointed by the Greek government and Bank of Greece last December–aren’t participating in Greek Treasury-bill auctions this year, according to several people familiar with the situation. Primary dealers are expected to support a country’s public debt markets by participating in bond auctions and quoting prices on secondary debt markets.

With trading so thin, the price of Greece’s debt has swung wildly in recent weeks. Bonds maturing in July 2017 fell from 87 cents on the euro in January to as low as 61 European cents in April, only to rebound to 74 cents Friday.

“Greece is too binary” to get involved in, since bonds will either rally sharply if an agreement with creditors is reached or plunge if Greece defaults, said Ariel Bezalel, a fixed-income fund manager at Jupiter Asset Management, which oversees GBP32 billion ($48.5 billion) in assets. “It’s toss-a-coin stuff.”

U.S. Treasury bond prices tumbled Friday for a fifth straight day, capping the biggest weekly selloff in nearly two months.

The yield on the benchmark 10-year Treasury note settled at 2.119% Friday, the highest closing level since early March, compared with 1.917% a week ago. When bond prices fall, their yields rise.

Friday’s selling was driven in part by a report pointing to stabilization in the U.S.’s manufacturing sector, which spurred hopes that the U.S. economy may regain momentum following a recent soft patch. Investors also expect next Friday’s non-farm jobs report for April to show solid jobs growth, shaking off the weakness in March.

Energy:
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Crude oil futures slipped in Asian trade after the HSBC China Manufacturing Purchasing Managers Index, a gauge of nationwide manufacturing activity, fell in April.

China is one of the biggest importers of crude oil. Oil prices also came under pressure Friday after reports that Iraq had raised monthly crude exports to the highest levels in three decades, said an ANZ report.

At 0313 GMT, Nymex WTI crude was down 41 cents at $58.91/bbl, while Brent crude was down 11 cents at $65.29/bbl.

Metals:
======

Gold prices rebounded slightly in Asian trade, although well below the psychological level of $1,200/ounce.

The precious metal fell to a six-week low on Friday as traders reconsidered when the Federal Reserve may raise interest rates. This followed the latest data from the Labor Department that showed a sharp decline in the number of Americans applying for unemployment benefits. At 0227 GMT, gold was 0.4% higher at $1,182.90/ton.

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