Three snapshots for Tuesday
The euro zone just avoided recession in the first quarter of 2012 but the region’s debt crisis sapped the life out of the French and Italian economies and widened a split with paymaster Germany.
Click here for an interactive map showing which European Union countries are in recession.
The technology sector has been leading the way in the S&P 500 in performance terms so far this year with energy stocks at the bottom of the list. Since the start of this quarter financials have seen the largest reverse in performance.
Three snapshots for Monday
The yield on 10-year U.S. Treasuries, fell to their lowest levels since early October today, breaking decisively below 1.80 percent. That compares to the dividend yield on the S&P 500 of 2.28%.
The European Central Bank kept its government bond-buy programme in hibernation for the ninth week in a row last week. The ECB may come under pressure to act as yields on Spanish 10-year government bonds rose further above 6% today.
Output at factories in the euro zone unexpectedly fell in March, the latest in a series of disappointing numbers signalling that the bloc’s recession may not be as mild as policymakers hope. On an annual basis, factory output dived 2.2 percent in March, the fourth consecutive monthly slide, Eurostat said, and only Germany, Slovenia and Slovakia were able to post growth in the month.
Three snapshots for Wednesday
This chart shows the wide dispersion in equity market performance so far this year. In local currency terms Korea has a total return of nearly 12% and Germany over 10%, this compares to Italy at-6% and Spain at -16%.
In contrast to last year, this has driven average correlations between equity markets lower.
However, correlations may well pick up if markets move back into ‘risk-off’ mode. The chart below showing the weakness in the Citigroup G10 economic surprise indicator seems to be pointing towards further weakness in bonds relative to equities.
Three snapshots for Tuesday
Equities in the countries most exposed to the euro zone crisis seem to be being hit especially hard this year. The Datastream index of shares in Portugal, Italy, Ireland, Greece and Spain has a total return of -5.3% this year compared to +8.9% for a euro zone index excluding those countries.
U.S. consumers went back to using their credit cards in March to keep spending while student and new-car loans shot up as the value of outstanding consumer credit jumped at the fastest rate since late 2001, data from the Federal Reserve showed on Monday.
Total consumer credit grew by $21.36 billion – more than twice the $9.8 billion rise that Wall Street economists surveyed by Reuters had forecast.
Perhaps some of that credit card spending is finding its way to luxury goods companies – there certainly don’t seem to be too many worries about an economic slowdown coming through in their share price performance:
Three snapshots for Thursday
The European Central Bank kept interest rates on hold on Thursday. President Mario Draghi urged euro zone governments to agree a growth strategy to go hand in hand with fiscal discipline, but as thousands of Spaniards protested in the streets he gave no sign the bank would do more to address people’s fears about the economy
The divergence between Euro zone countries is starting to impact analyst estimates for earnings. As this chart shows earnings forecasts for Spain and Portugal are seeing more downgrades than Germany or France.
The inflation rate in Turkey rose to 11.1% in April, putting pressure on the central bank to raise interest rates:
Three snapshots for Friday
The U.S. economy expanded at a 2.2 percent annual rate in the first quarter, slightly weaker than expected. Consumer spending which accounts for about 70 percent of U.S. economic activity, increased at a 2.9 percent rate – contributing two percentage points to the overall growth rate.
Sell in May and go away? Here are the average numbers for the MSCI world equity index:
More awful economic numbers from the euro zone, Spanish unemployment hit 24.4% in Q1 2012 with youth unemployment rising to 52%.
Research Radar: “State lite”?
The FOMC’s relatively anodyne conclusions left world markets with little new to chew on Thursday, with some poor European banking results for Q1 probably get more attention. Broadly, world stocks were a touch higher while the dollar and US Treasury yields were slightly lower. European bank stocks fell 2% and dragged down European indices. Euro sovereign yields were slightly higher, with markets eyeing Friday’s Italian bond auction. Volatility gauges were a touch lower and crude oil prices nudged up.
Following is a selection of some of the day’s interesting research snippets:
- Deutsche Bank’s emerging markets strategists John Paul Smith and Mehmet Beceren said they retain their negative bias toward global emerging market equities both in absolute and relative terms, highlighting Argentina’s expropriation of YPF from Repsol as another negative. “We anticipate that so-called state capitalism will continue to be a negative driver, as it has been since mid-2010, since the poor economic backdrop makes the corporate sector a tempting target for governments wishing to boost their popularity or find additional resources to add to the relatively low levels of social protection across most emerging economies.” They added that they remain overweight “state lite” emerging markets such as Taiwan, Mexico and Turkey and underweight Russia, China, Brazil and South Korea.
- Morgan Stanley’s James Lord thinks the rally in Hungary’s markets following Tuesday’s decision by the EU to reopen negotiations on financial assistance is justified but much may now be in the price. He said MS would prefer to wait for some pullback before looking for more bullish trades. On a relative basis, Hungary 5-year CDS is now 60bp wider than Spain’s and MS said that while this gap could close much further it was hard to see how Hungary CDS rates could trade below Spain. “Indeed, if Spain goes into serious financial trouble, it could represent a systemic risk for all Europe, and funding stress would likely increase substantially. Given the strong dependence of Hungary towards the EU, it would be difficult to argue for Hungary to trade through Spain on any sustained basis.”
- Ashmore Investment Management’s Jerome Booth restates his bullish case for emerging markets with 10 points that conclude with the line: “the best way to lose money without really trying is not to invest in emerging markets.” His points include warnings about equating past volatility with risk, passive investing (where he points out that only 12% of emerging debt is represented by available indices) and seeing emerging currency volatility against the dollar as an emerging problem rather than a U.S. one (“It is the dollar which is volatile”.)
- Legal & General Investment Managers’ Ben Bennett argues that central bank money printing will be needed for some time as banks’ bad loans are still way too high for them to be “in a position to drive the money printing presses once again”. Explaining QE as a nationalisation of money printing presses normally operated by the commercial banks, he says the success of either form of money creation can only be judged by the productive nature of use to which that money is put. The pre-crisis lending into the property bubble was negative case in point, and the relative success of QE lending to the banks will be even more complex to judge. “The investment lesson to be learnt is not to follow the money, but to analyse the usefulness of what it is being spent on.”
Three snapshots for Tuesday
U.S. consumer confidence came in slightly weaker than expected but the ‘jobs-hard-to-get’ index – historically a good lead indicator of the unemployment rate - fell to 37.5 in April.
Spanish equities in price terms are near their 2009 lows but valuations are still some way above:
Australian consumer prices rose by less than expected last quarter while key measures of underlying inflation showed the smallest rise in more than a decade, paving the way for a cut next week and suggesting further cuts were possible.
Three snapshots for Friday
Although the focus has been on Spanish debt auctions this week as this chart shows Italy has much further to go in meeting this year’s funding needs.
German business sentiment rose unexpectedly for the fifth month in a row in March, moving in the opposite direction to the composite PMI:
Greg Harrison points out 82% of S&P 500 companies have beaten their Q1 earnings estimates so far. It is early days but it it continues that would be the highest for at least five years. Is this a sign that the strength in corporate earnings in continuing? The chart below suggests as least part may be due to falling expectations coming into earnings season.
Play the mini-cycles, not the euro crisis
For all the headline attention on euro zone political heat over the next six weeks or so (Spain is already in the spotlight, Sunday is the first round of the French presidential elections, Greece goes to the polls on May 6, Ireland votes on the EU fiscal pact on May 31 etc etc), global investors may be better rewarded if they follow the more mundane runes of the world’s manufacturing cycle for tips on market direction.
As showcased by the IMF this week, the big picture global growth story remains one of a relatively modest slowdown this year to 3.5% before a substantial rebound in 2013 to well above trend at 4.1%. Of course, there are some who think that’s hopelessly optimistic and others who may quibble about the absolute numbers but agree with the basic ebb and flow.
Yet within even these headline numbers, many mini-cycles are playing out — especially within manfacturing, which accounts for about 20% of global GDP. But problems in deciphering these twists and turns have been compounded over the past year or so by the impact from natural disasters and supply chain disruptions such as Japan’s devastating earthquake and Thailand’s floods.
Crunching the numbers for Q1, however, JPMorgan’s global economists reckon global maufacturing output hit an annualised quarterly clip of some 5.6%. Even though that’s still off the pace of one year ago, it’s back near levels seen in Q3 of last year before the late-year slump. Breaking that down, the United States accounted for more than a half the Q1 rebound while emerging Asian economies, benefitting most from the bounceback after Thailand’s floods, zoomed at a 20% annualised rate.
However, this impressive manufacturing bounce is already ebbing again in the second quarter. The Thai bounceback looks spent and an acceleration in US inventory accumulation is now slowing output there.
Although only one part of a more complex GDP picture (we will see Q1 GDP readouts from the United States and Britain next week as well as flash April business sentiment gauges for Europe and China), world equity markets appear to be taking a lead from the manufacturing pulse — surging in Q1 and now cooling into April. If so, what can be said about the rest of the year? JPMorgan at least reckons we’re in for another reacceleration around mid-year, for a variety of the seasonal, inventory and disaster-related reasons already affecting the mini-cycle and with a rebound in utilities output as weather normalises stateside and in Europe.
So while Europe’s ongoing sovereign debt and banking crisis continues to pose risks to the global economy, its impact ont he wider world may be getting weaker. And it’s curious that a possible re-acceleration of manufacturing this Summer could come in tandem with important junctures in the euro saga itself — namely the European Banking Authority’s June recapitalisation deadline for euro area banks and also the introduction of the permanent European Stability Mechanism to shore up the rest. Deadline-driven deleveraging and global asset sales by euro zone banks, mercifully slowed by the ECB’s cheap 3-year LTRO in December and February, was easily been the biggest external transmission mechanism of the euro crisis last year. Once that has passed, it’s possible there may even be some financial sector relief to add a fillip to any manufacturing resurgence.
