Merkel’s Back For Germany. What Does That Mean For Europe? (+video)

US Data Pull Europe Stocks from Intraday High

Manufacturing Purchasing Managers Index (PMI) retreated to 52.8 this month from 53.1 in August, confounding analysts’ forecasts of an improvement. A reading above 50 indicates expansion. Output growth accelerated but new order inflows slowed, suggesting “production growth is likely to weaken in the fourth quarter unless demand picks up again in October,” said Chris Williamson, Markit’s chief economist. The Fed surprised markets last week by postponing a reduction of its massive, $85-billion (53 billion pounds)-a-month bond-buying program, while downgrading its growth forecasts. Conflicting views from policymakers of when the wind-down will come has left markets uneasy, while the threat of another fight on Capitol Hill over how much the United States can borrow loomed large. The uncertainty emanating from Washington took the shine off a German election triumph for Angela Merkel which confirmed she would remain Europe’s dominant leader as the continent tries to put its debt crisis to bed. Still, the bloc should be able to take on its continuing challenges from a position of improving economic growth, after the region pulled out of recession in the second quarter. Markit’s Eurozone Flash Composite PMI jumped to 52.1 in September from last month’s 51.5, its highest since June 2011 and beating expectations for a reading of 51.9. The pace of expansion in the bloc’s dominant services sector also beat all forecasts in a Reuters poll and the surveys suggested the recovery was becoming more broad-based. Business at firms in Germany, Europe’s largest economy, expanded at a faster pace than last month and in France, the second biggest, activity increased – albeit marginally – for the first time in 19 months. FORWARD MARCH Markit said the composite euro zone PMI, which surveys both manufacturing and service sector companies across the region and is seen as a good guide to economic growth, pointed to a 0.2 percent expansion this quarter, matching a Reuters poll taken earlier this month. “Today’s PMI figures support the view that the euro zone recovery is gradually becoming more entrenched and, as such, further reduce the odds that the ECB will follow up its forward guidance rhetoric with action,” said Martin van Vliet at ING. European Central Bank President Mario Draghi said earlier this month monetary policy would remain accommodative for as long as necessary, and that interest rates would remain at present or lower levels for an extended period of time. However, some analysts had speculated the bank may take solid action to keep a lid on rising loan rates which could inhibit the recovery. New business in the bloc increased again this month, boding well for October activity, and it was a similar story in China where new export orders jumped to a 10-month peak.

and 0.1 percent in Japan. The European Central Bank could step in if needed, said Nicolaas Marais, who helps oversee $327 billion as head of multi-asset investments and portfolio solutions at Schroders Plc in London. There are some signs of economic stabilization and portfolio rebalancing from the U.S. and emerging markets to Europe. All in all, its too much for shorts to bet against. Investor Allocation ECB support may be helping attract investors. Thirty-six percent of respondents in a survey this month by Charlotte, North Carolina-based Bank of America said they hold more euro-area equities than are represented in global benchmarks, the highest level since May 2007, when the subprime-debt crisis began. A year ago, they reported the smallest allocations to the region relative to the rest of the world, the survey showed. In todays prolonged bull market, it has been hard for short sellers to bet against a rising tide, said Will Duff Gordon, the research director at Markit in London. The muted borrowed demand today is the new reality. Borrowed stock in BBVA (BBVA) , Spains second-biggest bank, has fallen to 0.23 percent of the Bilbao-based companys outstanding shares, from 2.41 percent two years ago, Markit data show. The stock surged 41 percent in the period. Renault Borrow Loans of shares on Paris-based Renault, Frances second-largest carmaker, account for 0.92 percent, down from 2.25 percent in 2011 as the shares more than doubled, the data show.

Merkel Seen Likely to Slowly Pull Coalition Left

The Conference Board’s consumer confidence index fell to 79.7 in September from a revised 81.8 the previous month. Additional data out on Tuesday showed a slowdown in home-price growth for July, as higher mortgage rates appeared to hit the housing market. Investors are closely watching data from the U.S. to see if they’ll strengthen or weaken the case for the Federal Reserve to start tapering its $85-billion-a-month asset purchase program. The central bank surprised the markets last week by keeping its bond buys intact because of soft U.S. growth, prompting a short-term rally in stock markets on the prospect for continued cheap liquidity. New York Fed President William Dudley said Monday that the economy currently is too weak to scale back the bond-buying program and that “there has been no pickup in its ‘forward momentum'”. “As far as I am concerned, the Fed tapering is inevitable and it’s something that will only happen on positive economic activity. On the one hand, it will force interest rates a bit higher, which is partly negative for the stock market, but it will happen in an environment where economic conditions have improved,” said Mr. Lilley. U.S. stocks were mostly higher on Wall Street.

A grand coalition is not going to change a thing, says Sophie Wennerscheid, outside of a polling station in a gentrified neighborhood of Berlin. She voted for The Left, which ultimately got 8.5 percent of votes. The Greens, another popular party in bourgeois areas of Berlin, got around 8 percent. New moves in Europe and abroad? Merkel has already overseen the deepening of European economic integration, notes Jan Techau, the director of Carnegie Europe in Brussels, in a recent opinion piece in The New York Times. But last month she announced that perhaps it was time to return powers to national governments from Brussels. It is unclear what that might actually look like, but it reflects growing weariness of EU bigfooting overall, which has been noted in several polls. One released last week by Open Europe and Open Europe Berlin, conducted by YouGov Deutschland, shows support among Germans for slimming down the EU. By a margin of two to one, German respondents said the next chancellor should push for decentralizing powers from the EU to national, regional, or local levels. That might be one reason that the euroskeptic Alternative for Deutschland party (Afd) nearly crossed the 5 percent threshold to make it into parliament, after just arriving on the scene this winter. They received 4.9 percent of votes.