MarketMinder Europe 

MarketMinder Europe

MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.

Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

June’s Global Flash PMIs Still Look Ok

Another month, another round of flash purchasing managers’ indexes (PMIs) giving an early read into major economies’ business activity. Though these business surveys from S&P Global mostly ticked down in June (as we will show), prompting more recessionary chatter from commentators we follow, their levels still indicate overall expansion based on the surveys’ methodology.[i] It may not be robust, but we don’t think stocks need perfection to mount a recovery from this year’s downturn—just for reality to beat dreary analyst forecasts and sour investor sentiment.[ii]

PMIs are surveys that aim to measure growth’s breadth. Readings above 50 indicate the majority of surveyed firms reported expanding business activity, hence, PMI readings over 50 signal growth and under 50 contraction—with growth (and contraction) theoretically accelerating the further readings drift from that marker. PMIs don’t say anything about how much their businesses grew (or shrank), only that they did, so we think they are a timely but loose estimate of economic activity at best. Amongst the various readings, the composite PMI combines services and manufacturing, but it is a narrower measure of their output that focusses only on production. The services and manufacturing PMIs are broader, including new orders, backlogs of unfilled orders, suppliers’ delivery times (a measure of supply chain pressures) and employment. That is why, for example, the composites for June’s US, UK and eurozone PMIs can be below each of their services and manufacturing PMIs.

Exhibit 1 shows major economies’ PMIs remain above 50—though they are down from the spring, implying deceleration (Japan excepted). The US and eurozone’s June flash composites, released with only 85% – 90% of responses in, fell to the low 50s, continuing a generally slower trend. This includes both services, which comprise the bulk of developed market economies, and manufacturing.[iii] But whilst low-50s PMIs aren’t historically robust, our research shows they generally coincide with pedestrian growth.

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On Wednesday's Dreary British and Canadian Inflation Data

The Anglosphere suffered another inflation blow Wednesday, this time courtesy of May data from Canada and the UK. Unsurprisingly, in our view, inflation (broadly rising prices across the economy) worsened in both nations, with consumer price index (CPI) inflation speeding to 7.7% y/y in Canada and 9.1% y/y in Britain.[i] And similarly unsurprisingly, in our view, coverage from commentators we follow was quite dour. We think that is understandable, considering inflation makes life difficult for many. It has also become a thorny political issue, so please understand that we are addressing this from an investing perspective only and don’t intend any political statements. To that end, whilst we don’t think either report yields any great insight from a data analysis standpoint, we find observers’ reactions rather illuminating on sentiment, as we think they show how far market outlooks have deteriorated. We hesitate to call it capitulation, but we think it does indicate it shouldn’t take much for reality to surprise positively later this year, which, in our view, could help bring stocks some relief.

In both countries, coverage from commentators we follow fixated on the alleged failure of monetary policy institutions to act against rising prices sooner and forecasts for inflation to get even worse before it gets better. There was a lot of blame tossed around by politicians, and a chorus of calls from publications we follow for the Bank of Canada and Bank of England (BoE) to do more to tackle the problem. Many of them also bemoaned that the rate hikes they view as necessary to beat inflation also risked “possibly” inducing recession (a decline in broad economic output), echoing US Federal Reserve head Jerome Powell’s comments to Congress Wednesday.[ii]

These forecasts for worse to come stem largely from the knowledge that oil and petrol prices continued rising in June, with food and metals prices also jumping.[iii] The weaker Canadian dollar and British pound also factored into warnings from observers, as they raise import costs.[iv] That got the blame for Canadian services prices rising 5.2% y/y, which we think seems rather suspicious considering US services inflation is even faster at 5.7% y/y in May and the dollar has soared this year.[v] In our view, a better explanation is that services prices are under a trio of pressures from reopening-fuelled demand, supply costs and labour shortages, creating a supply and demand mismatch. We think it is a global pandemic-driven dislocation that, whilst frustrating, is likely to ease as economies gradually return to pre-lockdown trends. But if observers’ hyper-focus on weak currencies creates much more dismal forecasts, then so much the better for stocks, in our view. Surprise power to lift markets up will theoretically be that much easier to attain.

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Some Key Concepts You Can Use in Navigating Today’s Markets

World stocks’ difficult first half of 2022 has continued in June amidst a cavalcade of concerns, evoking a constant drumbeat of headlines we read warning of worse to come.[i] In these trying times, the urge to do something may seem overwhelming—but doing something can easily backfire. In that vein, here are some dos and don’ts we think can help you in difficult times like the present.

We know market downturns can be hard—and frightening. Enduring one is far from ideal, in our view. When one comes amidst a series of seemingly relentless negative news stories, cutting equity exposure may feel like the sensible and prudent thing to do: Take your losses and live to fight another day. In our experience, though, that isn’t necessarily wise, as selling crystallises declines into losses and increases the chances you miss the recovery—the chance to recoup those declines. Hence, our first recommendation.

Don’t panic. When all seems lost, we think it is best to stay calm and collect yourself. First, assess your situation. Ask: Is my portfolio’s asset allocation (the mix of stocks, bonds, cash and other securities) designed with market downturns—even bear markets (typically lasting, fundamentally driven declines exceeding -20%)—in mind? Meaning, are the expected long-term returns it is based on inclusive of bear markets? If so, we think it is important to remember the returns this allocation plan hinges on include rough times like the present—or even worse. Mitigating bear markets’ drops may be nice, even beneficial, but we find it isn’t necessary to obtain equity-like returns over time.

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France's Parliamentary Elections Deliver Divides

Editors’ Note: MarketMinder Europe favours no politician nor any party. We assess political developments for their potential economic and market impact only.

France’s legislative elections delivered a major shift Sunday, but not the one political analysts we follow forecasted. Entering the weekend’s second-round vote, most observers anticipated President Emmanuel Macron’s Together! movement would lose its majority, and they did.[i] But the biggest beneficiary of Macron’s collapse wasn’t the leftist alliance known as Nupes (short for New Popular Union), which won the second-most seats but badly underperformed polling projections.[ii] Rather, Marine Le Pen’s National Rally—a nationalist party with a leftist economic platform—surprised observers by jumping from 8 seats to 89.[iii] Le Pen’s ascendance as the second-largest single party in the National Assembly has garnered attention from publications we follow in the days since, with most commentators foreseeing chaos and deadlock dooming Macron’s reform agenda. In our view, they are merely putting a colourful, hyperbolic spin on traditional political gridlock, which we think stocks will likely be just fine with once the uncertainty weighing on markets globally eventually starts clearing.

It takes 289 seats to win a majority in the 577-seat National Assembly, and most polls projected Macron’s bloc would get close. But in the end, they got just 245, followed by 131 for the Nupes, then the National Rally’s 89 and finally the centre-right Republicans’ 61.[iv] But even this is more fragmented than it looks, as the Nupes isn’t a party—it is an alliance of the green, centre-left and far-left parties.[v] The four participating parties agreed to field only one candidate for each seat, with candidates running under the alliance’s umbrella instead of their actual party.[vi] That alliance is already crumbling, with the participating parties shying away from leftist leader Jean-Luc Mélenchon’s desire to make the bloc a formal coalition in the assembly. Doing so could risk wiping out their parties’ identities and subsuming them into Mélenchon’s France Unbowed, which won the most seats amongst the four.[vii] That is probably a particular anathema to the centre-left Socialist Party, which has been fighting hard against its own obsolescence since 2017, when Socialist presidential incumbent François Hollande didn’t even bother seeking re-election.[viii] So, we think we will most likely see the Nupes splinter into four, with France Unbowed reportedly taking about 70 seats, followed by the Socialists, Greens and Communists.[ix]

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A Quick Reminder: Feelings Don’t Foretell

In America, the University of Michigan’s (U-Michigan) widely watched US consumer sentiment index fell to 50.2 this month—a record low, if the final reading confirms the preliminary estimate on 24 June.[i] This confidence measure matches other recent dour polls highlighted in financial headlines we monitor: See Bank of America’s June fund manager survey (73% of respondents anticipate a weaker US economy over the next 12 months) or GfK’s May UK Consumer Confidence Barometer, which hit a record low in May.[ii] In our view, the U-Michigan index’s record figure is an opportunity to revisit an important lesson for investors globally: Sentiment gauges, at best, reflect respondents’ feelings at the present moment. However, moods don’t foretell economic activity, and we think it is often wiser to view them as a sign of what markets already incorporated into share prices than what is to come.

All components of the U-Michigan index fell in June, from the outlook on business conditions over the next year (-24% m/m) to consumers’ assessment of their personal financial situations (-20% m/m).[iii] Amongst consumers, 46% attributed their negative views to inflation (broadly rising prices across the economy)—the second-highest share since 1981.[iv] Half of respondents “spontaneously” mentioned rising petrol prices in survey interviews, up from 30% in May and just 13% in June 2021, with consumers projecting petrol prices to rise by a median of 25 cents over the next 12 months.[v] From a historical perspective, the U-Michigan’s sentiment measure undercut its prior record low of 51.7 in May 1980, amidst that year’s recession (a prolonged and widespread economic contraction).

Exhibit 1: Feelings at a New Low?

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Italian Debt Catches the ECB's Eye

When global stock and bond markets entered this year’s rough patch, we thought it was probably only a matter of time before investors returned to a long-running perceived negative: Italian debt.[i] Any time eurozone bond yields rise, financial commentators we follow warn Italy’s debt woes will return, with soaring borrowing costs rendering the country unable to finance its debt—and resurrecting the eurozone debt crisis that occurred in 2011 – 2013. So it went this week as Italy’s 10-year yields jumped past 4.0%, leading to an emergency European Central Bank (ECB) meeting Wednesday to address the issue.[ii] In what we consider typical eurocrat fashion, the bank announced a plan to have a plan but offered scant detail, leaving observers guessing.[iii] Time will tell what exactly they roll out, but we don’t see much to suggest Italy needs the help.

Commentators we follow expressed some surprise last week when the ECB didn’t address Italian debt at its regularly scheduled meeting. Italian 10-year yields exceeded 3.0% at the time, and warnings about Italy’s debt were already percolating.[iv] The bank’s silence, coupled with its discussions about raising its policy rate later this summer, seemingly sent sentiment sharply lower, triggering that jump over 4.0% for the first time since 2013, as the eurozone crisis wound down. (Exhibit 1) Hence, Wednesday’s emergency meeting.

Exhibit 1: Italian Yields in Context

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Why the ECB’s Hiking Path Doesn’t Seem That Rocky to Us

Normally, we don’t think monetary officials’ actions to move short-term interest rates to 0% would constitute tightening monetary policy. Yet that is what commentators we follow seem to think since last Thursday, when the ECB announced its intention to hike policy rates by 25 basis points (0.25 percentage point) at its July meeting and beyond.[i] With its deposit facility rate currently at -0.5%, markets are expecting that to hit 0% by September.[ii] Many of those commentators blamed the ECB’s announcement for European stocks’ sharp selloff late last week.[iii] In our view, whilst 0% is higher than -0.5%, that doesn’t mean monetary policy is necessarily becoming more restrictive. Rather, we see it as a move back to normal after years of negative rates, which could very well bring some benefits.

The ECB has three benchmark rates it uses to conduct monetary policy: its main refinancing operations (MRO), marginal lending facility and deposit facility.[iv] The MRO rate is what banks pay to borrow from the ECB for a week. This borrowing is collateralised, meaning banks must provide the ECB with eligible assets to guarantee the loan. The MRO rate is currently set at 0%. The marginal lending facility rate is banks’ overnight borrowing cost, which is also collateralised, but typically costs more, now 0.25%.

The deposit facility rate determines what banks receive for keeping funds at the ECB overnight.[v] Notably, this rate has been negative since June 2014—which means banks have had to pay the ECB to store their money.[vi] Imagine paying your bank a 0.5% annual rate to hold your deposits—we think many would find this a bit unusual and perverse. The ECB has set this rate progressively further below zero—starting at -0.1% eight years ago and bottoming at -0.5% from September 2019 onward—in an attempt to spur lending.[vii] This may sound promising: Penalise banks for storing cash as a prod for them to lend instead. But the experiment hasn’t worked out that way, in our view. Our research finds it has backfired, weighing on lending—not prompting it—which is why we think the ECB’s aim to remove negative rates is a blessing in disguise, putting an end to a long-misguided policy.

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Silver Linings in UK GDP

As global markets suffered another bad day Monday, investors had more dreary news to chew over.[i] One bit came from the UK, where the Office for National Statistics (ONS) reported monthly gross domestic product (GDP, a government-produced measure of economic output) fell -0.3% m/m in April, the second-straight drop—setting off another round of recession warnings from commentators we follow.[ii] In our view, the jury is still out on the UK economy and whether this year’s painful cost-of-living increases will be enough to tip consumer spending—and overall output—negative for a sustained period. But under the bonnet, we think the seemingly weak GDP report featured some reasons for optimism.

As most of the coverage we encountered pointed out, all three of the major monthly GDP components—services, heavy industry and construction—fell. Industrial output fell -0.6% m/m, with manufacturing (-1.0%) leading the way down, whilst construction activity fell -0.4%.[iii] Services—about 80% of total UK output—fell -0.3% m/m, but this comes with a big asterisk: the end of COVID testing and tracing and the waning vaccination programme.[iv] COVID-related activity has skewed GDP wildly at times over the past two years, as it shows up as big jumps and dives in the human health and social work activities component of services industry output—an economic accounting quirk that appears to be largely unique to the UK. This category fell -5.6% m/m in April, shaving half a percentage point off the service sector’s growth rate.[v] Exclude it, and services would have grown 0.2% m/m, which would be enough of a move to make headline GDP growth flattish or slightly positive.[vi] Now, flattish growth isn’t great, but it also isn’t a deepening contraction, and the latter is what many commentators we follow warn of now.

Elsewhere in the services sector, we see some bright spots—especially in consumer-facing areas that, in theory, should be benefitting from the easing of COVID restrictions and return of travel and leisure activities. Overall, the ONS estimates consumer-facing services rose 2.6% m/m.[vii] Wholesale and retail trade jumped 2.7% m/m—and that figure is adjusted for inflation—whilst activity at restaurants and hotels rose 1.0%.[viii] The nebulously named “other service activities,” which includes the beauty industry, soared 5.5% m/m.[ix] Interestingly, retail’s rapid rise came despite the tax hikes and energy price cap increase that took effect in April, suggesting that—at least at the outset—consumers were far more resilient to these added pressures than many economists we follow deemed likely. Also positive, in our view: Auto sales contributed strongly to the retail total as supply recovered, seemingly confirming our hunch that March’s slide wasn’t a product of weak demand.

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Europe's Recent Data Divide

A curious trend appears to have emerged in Continental European economic data in recent weeks—one we think is worth watching. Whilst so-called soft data (e.g., survey-based indicators, chief amongst them purchasing managers’ indexes, or PMIs) have stayed strong across the board, some hard data (e.g., output measures like retail sales and industrial production) have struggled. As we will show shortly, French industrial production and German retail sales defied PMIs with contractions in recent days, missing analysts’ consensus expectations in the process. German industrial production, released Wednesday, did grow 0.7% m/m in April, but that figure also missed expectations—and follows a worse-than-expected -3.7% decline in March.[i] Now, we don’t think this is predictive for eurozone stocks, as we think markets are forward-looking and these economic data reveal only what just happened. But we do think the data perhaps shed light on what eurozone stocks pre-emptively incorporated into share prices already, and, in our view, they illustrate the follies of relying too much on any one indicator.

Exhibits 1 – 4 show the past few months’ worth of hard and soft data for the eurozone’s four largest economies (Germany, France, Spain and Italy). We limited our look to this short window for a simple reason: Commentators we follow globally warn the war in Ukraine is a huge risk for Continental Europe’s economy, and that conflict started in late February.[ii] We suspect one looking only at PMIs would presume all four have strongly sailed through this period. But harder data show some struggles.

Exhibit 1: Germany

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A Busy Two Days in European Politics

Fresh off the Platinum Jubilee bank holiday, summer is in full bloom—traditionally the start of a relatively quiet stretch in world politics. But not so this year: Global politics’ start to the season seems far busier than the norm, giving us plenty of market-related tidbits to consider. As always, we don’t prefer any politician or party in any country, and look at these developments through a purely market-orientated lens. So what are the potential market implications of several Conservative members of parliament (MPs) moving against UK Prime Minister (PM) Boris Johnson, the latest warnings over this month’s French legislative elections and the Swedish government’s brush with a collapse? Let us explain.

Boris Johnson Keeps His Job … for Now

When the scandal known as Partygate flared back up last week, several Conservative MPs renewed their calls for Johnson to resign over the revelations contained in senior civil servant Sue Grey’s report on the gatherings that occurred whilst the country was under lockdown. Within days, 54 had submitted formal letters of no confidence to the party’s 1922 Committee of backbench MPs, triggering a party no-confidence vote Monday.

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Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.