European economies showed further signs of stabilization in January with flash PMIs registering continued strengthening on most fronts (this week will see a number of actual PMI readings). The only noteworthy exception was France where conditions deteriorated further, with the composite reading falling to 42.6 (from 44.7 in December) and hence showing a sharp contraction. At the other end of the scale was Germany, where the composite showed 53.6 (up from 50.3 in December), an evidently positive surge in activity.

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In our view, the Spanish banking system is in need of wholesale recapitalisation to deal with the sizeable losses in the country’s property market. This will likely include a bad bank provision. Before that happens, the ECB’s open market operations will mainly buy time in the form of liquidity as well as provide banks with money to exchange bad loans for lending to the government.