Strong declines in Chinese markets after the reopening of quotations do not worsen global sentiment. The final PMI indexes of the industry in the eurozone are again slightly above expectations. Employment in Polish industry falls the fastest in 10 years.
Drops in China with limited impact on the market
The market is currently affected by reports of the Chinese virus. Following a week-long break, the stock exchange in China reopened trading. It started with sharp declines. The main indexes recorded the worst opening since 2007 and the most eminent depreciation since 2015 (nearly 8%). However, this did not translate into a strong deterioration in sentiment in Europe, where most of the main indexes increased. The reason for slight optimism may be the final data of PMI industrial sector indexes of the eurozone in January.
Even the preliminary data came as a small surprise (although it was mainly due to the increase in expectations in the two largest economies), and the final readings of the PMI indexes published today by IHS Markit have again exceeded market expectations. The index of industrial activity in the common currency area still indicates its decline (below 50 pts), but its scale is getting smaller. January's reading of 47.9 points for the eurozone was the highest since April and 0.1 points higher than preliminary data (mainly due to Germany, France and Italy).
This may create a slightly better picture of the eurozone economy already at the beginning of the year. Market attention in the coming weeks and months will probably focus on the impact of the Chinese virus on economic growth. The fact that the Chinese economy will suffer in the first quarter is almost certain. However, a significant reduction in demand in China may reduce international trade and have a negative impact on other regions over time. The longer the spread of the virus continues and the longer preventive measures (e.g. exclusion of certain flights, quarantine of cities in China, closure of borders with China), the greater the impact of the epidemic on the global economy.
The market is currently not pricing the worst-case scenario, i.e. a long-term negative impact on demand and economies. The prevention measures that have been introduced to limit the spread of the virus seem to calm the market. Sentiment may, of course, deteriorate with the inflow of negative information. Still, when there are signs that the virus is no longer spreading, sentiment may improve, and market participants may see the current correction as an opportunity to buy.
Polish industry with the worst results in 17 years
In a slightly different tone than the PMI data from the eurozone, were the same readings from Poland. The index for the industrial sector fell to 47.4 pts, 0.9 pts below expectations and 0.6 pts below the December reading. According to the survey data, employment in Polish industry fell in January at the fastest pace in 10 years. Output in the sector fell for the 15th consecutive month, which was the longest negative streak in 17 years. Only new orders were positive, with the rate rising the fastest in 5 months and in the case of future production in 8 months.
Activity in Polish industry in the coming months will most likely depend on the condition of the eurozone industry, especially in Germany. A slight improvement is observed there, although forecasts for the following months should be approached with caution, as the impact of the virus on the global economy is not yet known. The zloty's reaction to today's worse-than-expected PMI data was limited. However, after Poland's GDP growth pace for 2019 was lower than expected, weaker industry data may depreciate the zloty slightly in case of strong deterioration.
Today, the Polish currency's quotations remained relatively stable, which was helped by a calm trading session in Europe. The EUR/PLN exchange rate oscillated around 4.30, the USD/PLN pair around 3.87-3.89 and the CHF/PLN pair around 4.01-4.03. A significant drop was recorded in the GBP/PLN pair, slightly exceeding 5.07. This is a result of the global weakening of the pound, which was already happening in the early morning hours. The GBP/USD exchange rate, falling to about 1.3050, reversed most of the growths (slightly above 1.32) after Thursday's statement by the Bank of England in the afternoon.
After the UK left the EU, the market was also stimulated by the prospect of negotiating a new trade agreement. Today's statements by both Prime Minister Boris Johnson and the head of EU negotiators Michel Barnier suggest that negotiations may not be simpler than those on Brexit. This can cause significant fluctuations in the pound and also limit its potential for appreciation, even though it is the most overestimated of the major G10 currencies.