Flagging growth can't stop rally

Signs that the eurozone economy continues to stagnate didn't deter the onward march of risk assets on Tuesday.

The Markit Flash Eurozone PMI came in at 46.5, unchanged from the previous month. Germany's reading was 48.8, down from 50.6 in March and the lowest for six months. There was a slight glimmer of hope for France, where the PMI rose to 44.2 from 41.9. However, this is still in deep contraction territory and optimists on the French economy are few and far between.

Earlier PMI data on China was little better. The Markit/HSBC Flash China Manufacturing PMI came in at 50.5, down from last month and lower than expectations. China's growth slowed in the first-quarter and many expect that trend to continue over the rest of the year. A contraction in new export orders lends some support to this view.

Taken together, the data painted a grim picture. But did the markets react in kind? No, and that is becoming a more common occurrence in the era of central bank money-printing.

The Markit iTraxx Europe rallied 3.5bps to 107.5bps, its lowest level since the roll in March. Abundant liquidity, courtesy of the Bank of Japan and its counterparts in the US and UK, is providing crucial support to credit and equities.

Expectations that the poor data might force the ECB into easing monetary policy probably contributed to the bullish market performance. Peripheral financials were among the best performers, with Italian banks and insurers rallying strongly.

It is too early to say whether funds from Japan are flowing into high yielding assets in Europe, but it seems likely that investors elsewhere are shifting their allocations in anticipation of such a trend. Ireland, Spain and Italy all saw their sovereign CDS tighten significantly today and bond yields are also at very low levels, another sign that central bank intervention is lowering funding costs for governments.

Macro news overshadowed earnings today, but that won't last for long as Apple is due to report after the US close. The tech bellwether is expected to post poor results by its standards, and the figures will have a major influence on market direction tomorrow.

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