Markets starting to worry about an end to QE/LTRO liquidity?
Forward looking PMI data is starting to show a divergence between the UK and the euro zone:
German factory orders, which tend to lead GDP growth, fell 6.1% in February from the previous year.
OECD growth forecasts released today show the euro zone countries lagging behind other G7 countries:
Reuters latest asset allocation polls showed global investors cut government debt from portfolios in March:
Germany’s unemployment rate fell to a record low of 6.7% in March, bucking the trend in other euro zone countries:
Is China heading for a hard or soft landing? One chart to keep an eye on is the relative performance of materials equities, the long run of outperformance since 2000 looks like it might be rolling over.
Germany’s Ifo business sentiment index rose unexpectedly in March, moving in the opposite direction to the the PMI released last week:
Italian consumer morale also rose to 96.8, economists were expecting a slight decline to 93.7.
Yesterday’s much worse than expected PMI data from the euro zone has pushed the Citigroup economic surprise index for the region below zero.
Germany has been one of the strongest performing equity markets this year but is still in the middle of the pack compared to other European countries on valuation.
U.S. new home sales slipped 1.6 percent to a seasonally adjusted 313,000-unit annual rate. Economists polled by Reuters had forecast sales at a 325,000-unit rate in February.
The euro zone’s economy took an unexpected turn for the worse in March, hit by a sharp fall in French and German factory activity. The manufacturing purchasing managers indexes for France and Germany were both worse than even the most pessimistic expectations from economists polled by Reuters.
China’s HSBC manufacturing PMI also fell to 48.1, below 50 for a fifth straight month.
“Reflation trade”? Equities have been tracking the 5yr breakeven inflation rate derived from inflation-protected bonds.
The German ZEW economic sentiment index for March smashed expectations, coming in at 22.3 against the Reuters poll of 10.0. Over the last couple of years the German 10 year Bund yield has tended to track the ZEW, however this has broken down with yields staying below 2% despite the rebound in economic sentiment.
Improving earnings momentum has been backing up the rally in equities with fewer analysts taking the hatchet to earnings forecasts. The chart below shows that the 3-month average revisions ratio (the number of earnings upgrades minus downgrades as a percent of the total) looks to have turned back towards positive – especially in Europe.
Are emerging markets joining the dividend race?. As this chart of Datastream equity indices shows, the payout ratio for emerging market equities is now above that of the US. Traditionally seen as a growth-based investment, is this another sign of emerging market equities moving closer into line with developed?
With the ECB’s second cheap money flood in three months coursing through European banks and financial markets and the possibility at least of a further interest rate cut in offing, the relief in Europe’s austerity-wracked periphery is palpable. But what of the impact on the relatively buoyant “core” in Germany, the bloc’s largest economy and super-competitive export engine? Darren Williams at money managers Alliance Bernstein reckons German inflation is being cooked up by this super-easy ECB money, coming as it does against a backdrop of relatively brisk German credit growth and house price inflation there of some 5.5% last year which is “positively explosive by German standards”.
This is the flipside of pre-crisis euro zone problem with “one-size-fits-all” monetary policy. Before 2007, sluggish German growth meant ECB policy was kept far too loose for the faster-growing peripheral economies who then generated credit and inflation-fueled booms that boosted real-estate prices, private and public sector debts and eroded competitiveness. Now, monetary policy appropriate to a euro-wide slowdown fueled by the hobbled periphery looks far too too loose for Germany.
However, Williams posits that if Germany can tolerate an effront to its anti-inflation psyche then this move could help rebalance skewed intra-euro current accounts by boosting German domestic demand for the exports of its troubled euro neighbours while curbing the super-competiveness of German exports flooding other euro economies and undermining producers there. That’s not the way many in Germany want the rebalancing to happen clearly. But even the most ardent hawks in Berlin probably now acknowledge that endless austerity and economic contraction in its nearest neighbours or the sort of financial implosion likely from a euro collapse would not be in Germany’s best interests either. So, a little compromise perhaps.
Anyone worried about Greece and the potential impact of the euro debt crisis on the world economy should have a chat with Jim O’Neill. O’Neill, the head of Goldman Sachs Asset Management ten years ago coined the BRIC acronym to describe the four biggest emerging economies and perhaps understandably, he is not too perturbed by the outcome of the Greek crisis. Speaking at a recent conference, the man who is often called Mr BRIC, pointed out that China’s economy is growing by $1 trillion a year and that means it is adding the equivalent of a Greece every 4 months. And what if the market turns its guns on Italy, a far larger economy than Greece? Italy’s economy was surpassed in size last year by Brazil, another of the BRICs, O’Neill counters, adding:
“How Italy plays out will be important but people should not exaggerate its global importance. In the next 12 months the four BRICs will create the equivalent of another Italy.”
Emerging economies are cooling now after years of turbo-charged growth. But according to O’Neill, even then they are growing enough to allow the global economy to expand at 4-4.5 percent, a faster clip than much of the past 30 years. Trade data for last year will soon show that Germany for the first time exported more goods to the four BRICs than to neighbouring France, he said.
One of the more bizarre aspects of the euro zone crisis is that the currency in question -- the euro -- has actually not had that bad a year, certainly against the dollar. Even with Greece on the brink and Italy sending ripples of fear across financial markets, the single currency is still up 1.4 percent against the greenback for the year to date.
There are lots of reasons for this. The dollar is subject to its country's own debt crisis, negligible interest rates and various forms of quantitative easing money printing -- all of which weaken FX demand. There is also some evidence that euro investors are bring their money home, as the super-low yields on 10-year German bonds attest.
Finally -- and this is a bit of a stretch -- some investors reckon that if a hard core euro emerges from the current debacle, it could be a buy. Thanos Papasavvas, head of currency management at Investec Asset Management, says:
