Spain’s HCOB Services PMI registered 50.1 in May, coming in above forecasts of 48. The reading sits just above the 50-mark that separates expansion from contraction, suggesting a marginal improvement in service-sector activity over the month.
While the headline figure exceeded expectations, the data point implies only a thin buffer above the threshold. Markets will weigh whether the move from the forecast level to 50.1 marks a durable shift in momentum, or merely a near-stagnation outcome consistent with subdued underlying growth.
Implications for Equities and Currency Markets
We see the Spanish services data as a sign that pessimism about the European economy may be overdone. The number beat forecasts and, crucially, stayed above the 50 mark that signals growth. This suggests underlying resilience that the market has not fully priced in.
This positive surprise should give a lift to Spanish equities, especially in the services-heavy IBEX 35 index. We are looking at buying call options on the IBEX 35 for July expiration, as a similar upside PMI surprise in late 2024 preceded a 5% rally in the following six weeks. With the index currently down 3% over the last month, conditions are set for a potential rebound.
The data also provides a small but notable support for the Euro. Given that recent commitment of traders reports show a build-up in short Euro positions, this unexpected strength from a major EU economy could trigger some short covering. We feel buying near-term EUR/USD call options is a cost-effective way to position for a relief rally toward the 1.09 level.
Impact on Rates and Volatility Strategies
This resilience reduces the chances of an early interest rate cut from the European Central bank. Market pricing for a September cut, which stood at a 60% probability last week, has already fallen to below 45% this morning. We should consider positioning for stable-to-higher rates by selling futures contracts on the Euribor.
Finally, this result should lower near-term market fear, which is a headwind for volatility. Implied volatility on European stocks, as measured by the VSTOXX index, is already down 4% to 15.1 on the news. We believe selling out-of-the-money put options on the Euro Stoxx 50 index is a good strategy to collect premium as recession fears temporarily fade.
