European economic data on Wednesday were better than expected but still weak.
Markit's Eurozone composite PMI for June was revised up to 46.4 from a preliminary reading of 46.0, which had been the same as May's. The rise in the composite PMI was boosted by a rise in the services PMI to 47.1 in June from 46.7 in May.
Eurozone retail sales also showed a rebound in May, rising 0.6 percent after having fallen 1.4 percent in April.
In the UK, the services PMI fell to 51.3 in June from 53.3 in May.
Wednesday also brought a sign that China's services activity slowed in June. HSBC's services PMI fell to 52.3 last month from 54.7 in May.
In his Absolute Return Letter for July, Niels Jensen notes that the economic outlook is deteriorating, with a European recession “already baked in the cake” and China also looking “particularly vulnerable”.
A cyclical slowdown is not the only challenge the Chinese are facing. The urbanisation of the country is slowing from an estimated 3-4% over the past decade to 1-2% over the next decade. The labour pool is peaking as we speak and demographics will become an increasingly negative factor in the years to come, all of which suggest that annual GDP growth in China is likely to slow to 5% or even less in the not so distant future.
Indeed, Jensen thinks that Asia as a whole is at risk of a negative credit event, with cheap credit leading to a growing misallocation of capital and an increase in non-performing assets. However, with loan-to-deposit ratios still well below the levels in 1997, “such an outcome is probably not months but years away”.