Eurozone recovery slows as new orders fall for first time in four months

The eurozone’s economic recovery suffered a setback at the end of the second quarter of the year, according to provisional PMI survey data. New orders decreased for the first time in four months, feeding through to softer expansions in business activity and employment. Meanwhile, business confidence dipped to the lowest since February. Rates of input cost and output price inflation eased to six- and eight-month lows, respectively.

The slowdown in business activity growth seen in June was reflective of a softer expansion in the service sector and a more pronounced decrease in manufacturing production, which fell to the largest degree year-to-date.

Looking geographically across the euro area, Germany recorded a slight increase in activity in June, while the rest of the eurozone continued to record solid expansion, albeit with the pace of growth easing to a four-month low. Less positively, France posted a decrease in output for the second month running.

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, dropped to 50.8 in June from 52.2 in May. Although the latest reading signalled a fourth consecutive monthly increase in business activity and thus suggested that GDP will continue to expand in the second quarter, the latest rise in output was only slight and the weakest since March to signal a loss of growth momentum as the first half of the year draws to a close. Nevertheless, the average index reading over the second quarter was the highest for a year.

Growth was again limited to the service sector, where activity increased for the fifth month running. The latest rise was solid but the softest since March. Meanwhile, the recent improving picture in the manufacturing sector was reversed in June as production decreased at a marked pace that was the sharpest since the end of 2023. Manufacturing output has now fallen in 15 consecutive months.

Central to the slower expansion in overall business activity across the euro area in June was a renewed fall in new orders, which decreased for the first time in four months. The pace of decline was only slight, however. A marked reduction in manufacturing new orders outweighed a slight increase in services' new business. Demand weakness in export markets was particularly prevalent as new export orders decreased much more quickly than total new business. The decline in new business from abroad (including intra-eurozone trade) was the sharpest since February amid falls across both monitored sectors.

The eurozone’s largest economy, Germany, posted a third successive monthly increase in business activity, but the expansion rate slowed and was only marginal amid a renewed fall in new orders. France, meanwhile, saw output decrease at the quickest pace since February. The rest of the eurozone recorded a further solid rise in activity despite the rate of growth easing to a four-month low.

The deepening downturn in the manufacturing sector resulted in more pronounced reductions in purchasing activity and holdings of both purchases and finished goods in June. Most notably, the depletion in post-production inventories was the sharpest in almost three years. Falling demand for inputs meant for spare capacity in supply chains, and lead times on the delivery of purchased items shortened for the fifth consecutive month. The latest improvement in supplier performance was solid but the least marked since February.

After hitting a 27-month high in May, business confidence waned in June amid the fall in new orders. Optimism was the lowest in four months but still broadly aligned with the series average. Sentiment dipped in the manufacturing and service sectors, with services optimism dropping to the lowest since January.

 

Nordic banks rebuked for payments infrastructure deficiencies

The Swedish financial regulator Finansinspektionen (FI) is ordering Handelsbanken, SEB and Swedbank to rectify payment infrastructure deficiencies no later than December 2026. FI says it has also contacted the supervisory authorities in Denmark and Finland and informed them of the need to take corresponding measures for Danske Bank and Nordea.

All banks and payment services providers that perform electronic transfers within the EU must ensure that certain information about the payer and the payee is included with the transfers. Bank Girot is not specifically included in these requirements but plays a central role in the Swedish payment chain and is the only operations that has authorisation to conduct clearing of payments. This means that a large portion of the payments made within the country, such as invoices, salary deposits, and transfers between bank accounts, are compiled and controlled within the Bank Girot system.

However, the Bank Girot system has some limitations which entail that participating banks cannot meet the requirements in the anti-money laundering (AML) regulations on the transfer of information. Therefore, participants in the Bank Girot system lack the conditions to fully comply with the AML regulations. Hence, Bank Girot's Swedish owner banks, Handelsbanken, SEB and Swedbank, have been ordered by FI to take the measures necessary to ensure that the statutory information is included with transfers in Sweden.

“We have been monitoring for a long time how the owner banks are working on this matter and how they are planning to rectify the problem,” said Malin Alpen, Executive Director, FI. “We are now choosing to proceed with a strict time frame. We expect these deficiencies to be resolved.”

FI emphasised that the limitations in the Bank Girot system affect all Bank Girot and Data Clearing participants. However, FI is targeting the Bank Girot owners since they have the opportunity to rectify the deficiencies in practice.

FI does not have the same legal basis for intervention regarding the foreign-owned banks Danske Bank and Nordea. However, the regulator has contacted the relevant supervisory authorities in Denmark and Finland and informed them about the deficiencies in Bank Girot, and it says it will follow up on this matter in the future.

 

Goldman Sachs raises S&P 500 forecast

Goldman Sachs Research has raised its year-end target for the S&P 500 from 5200 to 5600, driven by milder-than-average negative earnings revisions and a higher valuation multiple. The S&P 500 index has returned about 15% since the start of the year, and earnings and valuation have contributed equally to that return.

Consensus earnings-per-share estimates have a typical pattern of negative revisions. That has been partially offset by stellar earnings growth registered by five megacap tech stocks. Consensus forecasts now imply a 31% gap between earnings per share growth for these stocks compared with the median S&P 500 firm (37% vs 6%).

David Kostin, chief US equity strategist for Goldman Sachs Research, writes that the team’s previous forecast assumed a year-end forward 12-month P/E multiple of 19.5x. They now expect the S&P 500 P/E multiple to be 20.4x by the end of 2024. Goldman Sachs Research's 2024 and 2025 earnings estimates remain unchanged. 

“Stable S&P 500 earnings estimates are unusual,” said Kostin. “Historically, starting at June of the previous year, consensus estimates have been cut by an average of 7%.” 

Going forward, Goldman Sachs Research expects milder-than-average revisions to S&P 500 earnings estimates until the end of 2024, since upward revisions to megacap tech earnings have already taken place.

 

Tata Communications secures 5-year US$250m sustainability-linked loan

Tata Communications has secured a five-year US$250m sustainability-linked loan (SLL) from ANZ, DBS Bank and Export Development Canada (EDC). ANZ acted as the lead sustainability coordinator for the loan, while DBS Bank and EDC were the joint sustainability coordinators.

The transaction is Tata Communications's first SLL under the company’s new SLL framework. Through the framework, Tata Communications intends to link its funding with key objectives, such as carbon emission reduction targets (non-financial covenants), that are core and material for the company’s long-term sustainability performance.

The loan's interest rate margin will be adjusted up or down according to Tata Communications' progress on its carbon emission reduction targets. Such short-term targets, which link the cost of banking facilities and progress achieved on key environmental milestones, are consistent with the company’s longer-term ambition to be Net Zero across its global operations by 2035.

“The pioneering transaction is a landmark step towards supporting our belief in sustainability as a value creator,” commented Kabir Ahmed Shakir, CFO, Tata Communications. “We intend to drive positive change not just within our own operations but also play a leading role in sustainable finance. We are confident that this innovative financing model will pave the way for a more resilient, more responsible future for businesses of all sizes and locations.”

 

AI could push banking industry profits to US$2 trillion - report

Citi Global Perspectives and Solutions has published ‘AI & Finance: Bot, Bank & Beyond’. The report analyses the role that artificial intelligence (AI) might play in changing how consumers and corporates bank.

From the likely use of autonomous agents seamlessly executing client decisions in the background to productivity gains released by unlocking better data insights, banking bots are set to revolutionise all aspects of banking, according to the report.

AI could boost the total banking industry’s 2028E profits by 9% or US$170bn, from just over US$1.8 trillion to nearly US$2 trillion. This excludes non-bank financial sector profits. 

The technology could drive productivity gains for banks by automating routine tasks, streamlining operations, and freeing up employees to focus on higher-value activities. Generative AI will likely greatly impact internal-facing tasks such as content and information management, coding, and software.

The growth of AI may lead to fewer low-skilled roles in operations and technology, but governance and compliance roles will continue to grow. Survey responses suggest AI talent availability is a challenge for banks and others. Talent wars are not over. Humans are still in demand. Historical technology adoption has not led to a reduction of the finance workforce but has changed the workforce mix over time. 

Finally, the report notes that integrating AI-powered bots into retail and corporate banking represents a significant potential transformation, offering clients benefits such as automated decision-making and the search for best offers and banks enhanced operational efficiency.

 

Acquirers see a continued increase in pre-deal due diligence for year ahead

Many professionals (43.2%) involved in their organisation’s M&A efforts, including those who directly serve on or contribute to corporate development and transactions workstreams, indicate they expect the level of due diligence requested on target acquisitions to increase in the next 12 months compared to the previous year, according to a Deloitte poll. That is an eight-point increase from a similar survey conducted in February 2023, which found that 35.2% of M&A professionals expected the duration and extent of buyer-requested due diligence to increase.

According to the data, heightened due diligence efforts are likely to focus on a smaller number of deals, with 40.7% of respondents indicating plans to pursue between one to two deals in the year ahead.

For 29.1% of respondents, economic concerns are driving the need for heightened due diligence, primarily to support deal forecast models. Another 24.1% say more due diligence is needed to support a successful merger through post-merger integration planning, while 17% attributed diligence needs to the tougher lending environment.

Despite lending challenges, more than one-quarter (26.6%) of M&A professionals say their organisation’s primary financing vehicle for acquisitions in the year ahead will be lender financing, including third-party loans from traditional lenders, private investors, and government sources (24.1%), or high-interest mezzanine loans (2.5%). Many (30.3%) respondents indicate that cash will remain their primary financing option, while another 15.9% indicate a preference for equity financing.

 

Number of UK industry sectors growing the highest in 15 months

More parts of the UK economy grew in May than at any time in the last 15 months, according to the latest Lloyds Bank UK Sector Tracker. While the overall rate of output growth across the economy slowed marginally in May (53.0 vs. 54.1 in April), 11 of the 14 UK sectors monitored by the Tracker reported output growth – up from eight in April and the most since February 2023. 

Real estate saw output rise at the fastest pace (58.9 in May vs. 51.6 in April), followed by chemicals manufacturing (58.7 vs. 48.6). A reading on the Tracker above 50.0 indicates expansion, while a reading below 50.0 indicates contraction. 

Broader growth was driven by more sectors experiencing rising demand. In May, nine sectors saw demand, as measured by new orders, increase. This was two more than in April (seven) and the highest number since February 2023. Chemicals manufacturers saw new order volumes expand at the fastest pace of any sector monitored (58.5 in May vs. 48.6 in April).

In May, the pace of the overall manufacturing sector’s output growth overtook services for the first time since January 2022 (53.4 for manufacturing vs. 52.9 for services). The Tracker’s exclusive PMI data reveals that this was underpinned by a broadening of both output and demand growth in sub-sectors across manufacturing. 

Last month, five of the seven manufacturing sectors monitored by the Tracker saw output expand, up from three in April. Meanwhile, four saw demand grow (from two), as measured by new order volumes. The increase in both demand and output was the most that the sector has reported since February 2023.  

Looking ahead, the number of manufacturers expecting output to be higher in a year’s time was the most in 27 months. Producers also increased stocks of inputs for the first time in almost two years.

 

RMB remains fourth most active global payments currency

Swift’s RMB Tracker has shown that in May 2024, the RMB remained the fourth most active currency for global payments by value, with a share of 4.47%. Overall, RMB payment value decreased by 1.43% compared to April, while all payment currencies decreased by 0.18%. Regarding international payments, excluding payments within the Eurozone, the RMB ranked fifth with a share of 3.12% in May.

The tracker uses data from live and delivered MT 103 and MT 202 - customer-initiated and institutional payments - and ISO equivalent messages exchanged on Swift. RMB’s fourth place out of all international currencies in May saw it behind the US dollar (47.89% of all global payments value), the euro (22.85%), and the British pound (6.84%).

As a global currency in the trade finance market, based on live and delivered inter-group only MT 400 and MT 700 messages exchanged on SWIFT, RMB ranked third based on value, accounting for 5.08% of May’s trade finance transactions. This field remains dominated by the US dollar (84.65%), while RMB also trailed the euro (5.63%).

Regarding FX spot transactions, RMB was May’s fifth most used currency for FX confirmations, moving ahead of the Canadian dollar in the month. The US dollar claimed the top spot, followed by the euro, pound and yen. In terms of the top economies carrying out FX spot transactions in RMB, the UK came out on top in May (40.95%), followed by the US (15.23%), Hong Kong (10.46%), France (8.58%) and China (6.94%).