Mish's Global Economic Trend Analysis

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• France, Italy, Spain Services PMI Show Continued Sharp Decreases; Eurozone Composite PMI Near 3-Year Low; Germany Services PMI at 6-Month Low
• Gaming the Odds of a Greek Euro Exit With and Without Contagion
• Oil Tanker Rates Lowest Since 1997 as Demand in Europe Plunges to 1996 Level, Production in US at 13-Year High; IMF Smoking Happy Dope

France, Italy, Spain Services PMI Show Continued Sharp Decreases; Eurozone Composite PMI Near 3-Year Low; Germany Services PMI at 6-Month Low Posted: 05 Jun 2012 06:57 PM PDT The Markit PMI data from Europe shows still more deterioration led by France, Italy, and Spain. Let's take a look at a few countries. France: Business Activity Continues Contraction at Marked Pace Key points: Final Markit France Services Activity Index at 45.1 (45.2 in April), 7-month low.  Final Markit France Composite Output Index at 44.6 (45.9 in April), 37-month low. Summary: French service providers registered another sharp decrease in business activity during May. Underlying the weak performance was a second successive fall in incoming new business, while backlogs of work fell further. Companies responded by cutting employment. Input price inflation eased to the slowest for over two years, allowing companies to reduce their charges further. Italy: Services Activity Continues Contraction at Sharp Rate in May Key Points: Business activity and new work both decrease markedly  Employment falls at slowest rate for seven months  Cost inflation weakest since last November Summary: The health of the Italian service sector deteriorated during May, with steep falls in both output and new business recorded. Confidence with regards to activity in the forthcoming year dipped further, though employment levels fell at a slower rate. Cost inflation meanwhile eased to the weakest in six months, but still contrasted with a sustained drop in output prices. Spain: Activity and new business both decline at faster rates Key points: Activity and new business both decline at faster rates  Job shedding intensifies  Sharp cuts in output prices as cost inflation eases Summary: The Spanish service sector fell further into contractionary territory during May as the economic crisis showed no signs of easing. Rates of decline in activity, new orders and employment all accelerated during the month. Meanwhile, input prices rose only slightly as companies attempted to reduce costs, and output prices were cut sharply again in response to strong competition and weak demand. Germany: German Composite Output Index in Contraction Key points:  Final Germany Services Business Activity Index(1) at 51.8 in May, down from 52.2 in April. Final Germany Composite Output Index(2) at 49.3 in May, down from 50.5 in April. Summary: May data pointed to a renewed slowdown in German service sector growth, as falling levels of incoming new work continued to weigh on business activity levels. At 51.8, down from 52.2 in April, the final seasonally adjusted Germany Services Business Activity Index pointed to the slowest pace of expansion since November 2011. Higher levels of output have now been recorded for eight months running, but the pace of expansion in May was below the average seen since the survey began 15 years ago (53.0). Eurozone: Composite PMI near-three year low in May Key Points: Final Eurozone Composite Output Index: 46.0 (Flash 45.9, April 46.7)  Final Eurozone Services Business Activity Index: 46.7 (Flash 46.5, April 46.9)  Widespread weakness across the currency union, with output falling across the big-four nations Summary: At 46.0 in May, down from 46.7 in April, the Markit Eurozone PMI® Composite Output Index signalled the steepest rate of decline in manufacturing and services output in the single currency area since June 2009. The headline index came in slightly above its flash estimate of 45.9, but remained below the neutral 50.0 mark for the fourth month running. Comment: Chris Williamson, Chief Economist at Markit said: "The final Eurozone PMI edged up on the flash reading in May, but nevertheless indicates that the economy is contracting at the fastest pace for around three years. Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand both in the euro area and further afield. Based on these numbers, it would not be surprising to see GDP for the region contract by 0.5% in the second quarter, though an even steeper decline could be seen if the June data disappoint." If the ECB is looking for an excuse to cut rates, it sure has one. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Gaming the Odds of a Greek Euro Exit With and Without Contagion Posted: 05 Jun 2012 01:54 PM PDT A key question on trader's minds is who will win the June 17th Greece election and whether it results in a Greek exit of the eurozone. Deutsche Bank gives it assessment in a report called Probability weighting EUR views on Greece Under a variety of assumptions, the market pricing looks consistent with: a) significant odds in favor of Greece remaining part of the EUR zone and EUR/USD trading between 1.25 and 1.30; and, b) a worst case Greek exit global contagion scenario taking EUR/USD to 1.10, but not to levels as low as parity. After the Greek elections, there are 6 main scenarios that are worth considering: A EUR friendly coalition probably led by New Democracy (ND) that does enough to keep Greece in the EUR.  A EUR friendly coalition probably led by ND that still leads to a Greek exit, but not a major global contagion event.  A EUR friendly coalition probably led by ND that still leads to a Greek exit (probably with a delay) because Greece fails to comply with the Troika program and this ends up in a major global contagion event  An anti-austerity led government, probably led by Syriza, that nonetheless compromises sufficiently, that Greece remains in the EUR at least through 2012.  An anti-austerity led government, that ends with Greece leaving the EUR but where contagion is relatively well contained.  An anti-austerity led government, that ends with Greece leaving the EUR which becomes a major global contagion event. Deutsche Bank Probability Chart click on chart for sharper image Odds Not 50-50 Deutsche Bank thinks the probability that New Democracy or Syriza wins is equal, 50% each. I think the odds Syriza wins is about a 2-1 favorite as explained in Greek Polling Ban In Effect Until Election; Latest Results Show SYRIZA Support at 31.5 percent, Well in the Lead Over New Democracy; Why I expect Syriza to Win For an update, please see "Terror-Mongering" in Greece About to Backfire? Will Greeks Vote for "Complete Idiots"? Four Possibilities Note that Deutsche Bank thinks that even if Syriza does win, Greece is as likely to remain in the eurozone as not. That strikes me as being far too optimistic. Even if  Syriza stays in for a while, it will eventually run out of money. Contagion Scenarios Finally, please note that the Deutsche Bank contagion scenarios total a mere 28%. What does "contagion" even mean? As I have explained before, Spain has problems of its own making not related to Greece at all. Spain is not going to exit the eurozone solely or even significantly because of Greece. True Contagion The true contagion scenario is not what people think but rather the reverse. Greece exits the eurozone, recovers, and other countries decide to do the same. In the context of the Deutsche Bank article, I fully expect Spain to exit the eurozone. Is that contagion? It depends on why and how you define the word. Finally, even if New Democracy wins, the odds of a Greek exit do not drop to a mere 5% as the above table shows. I would say they are still 50% minimum and depending on your timeframe as high as 85%. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Oil Tanker Rates Lowest Since 1997 as Demand in Europe Plunges to 1996 Level, Production in US at 13-Year High; IMF Smoking Happy Dope Posted: 05 Jun 2012 09:26 AM PDT Bloomberg reports Oil Tankers Squeezed as Rates Drop to Lowest Since '97. Aframaxes, already this year's worst- performing oil tankers, are poised for the lowest annual rates in at least 15 years as Europe's economic stagnation curbs demand, the region's most-accurate shipping analysts said. The 800-foot vessels will make about $12,000 a day in 2012, the least since 1997, said Anders Karlsen, an analyst at Nordea Markets in Oslo. His recommendations on the industry returned 25 percent in the past year, more than any shipping analyst in Europe tracked by Bloomberg. The vessels are struggling to win cargoes on all sides of the Atlantic, with European oil demand contracting for a sixth year at a time when the U.S. push for energy independence is driving down crude imports to the lowest since 1999. That's drawing more South American and West African supply to Asia on routes favoring very large crude carriers, displacing smaller Suezmaxes which in turn are competing with Aframaxes. "With the situation in Europe, the picture for Aframaxes is just abysmal," said Erik Nikolai Stavseth, an Oslo-based analyst at Arctic Securities ASA who anticipates an annual average of $10,000. "VLCCs are taking out Suezmaxes, and Suezmaxes are taking out Aframaxes," said Stavseth, whose recommendations returned 24 percent in the past year, the second-best performance in the region. European oil demand will decline 2 percent to 14.7 million barrels a day this year, the lowest since at least 1996, the Paris-based International Energy Agency estimates. The region's refineries are shutting at the fastest pace in three decades as economies stagnate or contract and competition from U.S. rivals using cheaper grades of crude intensifies. Aframaxes get 48 percent of their cargoes from Europe, Clarkson estimates. The U.S. is producing the most crude in 13 years after prices rose almost fourfold in a decade, Energy Department data show. Companies were drilling 2,329 wells last month, the most in a quarter century, the data show. Aframaxes rely on North America for about 14 percent of their cargoes, the same order of magnitude by which imports carried on the vessels will fall this year, according to Clarkson. The slump in European demand may reverse as its economies strengthen, with the International Monetary Fund predicting 2013 growth of 0.9 percent in the 17-nation euro zone, from a 0.3 percent drop in 2012. Comments From Tim Wallace Reader Tim Wallace says ... Hello Mish EU demand is dropping along the same lines as USA, six consecutive years of decline, now equal to 1996 levels. USA oil consumption is at 1998 levels. How can anyone not see the global economy never recovered from 2008? Only government debt spending has kept the economy from the abyss. As you know that is nothing but a misguided can-kicking exercise. IMF Smoking Happy Dope   To that I would add the IMF is smoking "happy dope" to believe the eurozone will contract a mere .3% in 2012 and expand at .9% in 2013. Moreover, the US economy is clearly slowing rapidly and is likely in recession right now. I will have the latest US 3-month oil usage charts from Tim Wallace shortly. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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