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.


Your Tuesday Data Delight

August—that interminable slow financial news month—is finally ending, and economic record keepers globally went out with a bang. Tuesday brought an avalanche of data, running the gamut from Chilean unemployment (improving to 8.9% in July) to Slovenian gross domestic product (accelerating from 1.7% y/y to 16.3% in Q2).[i] (Gross domestic product, or GDP, is a government-produced measure of economic output.) There were also some interesting nuggets from nations that play large roles in global developed equity markets, so let us bring you the two we found most interesting.

Is Germany causing a eurozone inflation headache?

The eurozone released preliminary August inflation today, and several financial commentators we follow described the acceleration from 2.2% y/y to 3.0% (versus expectations for 2.7%) as a “shock.”[ii] Shouldering much of the blame was Germany, which announced yesterday that inflation hit 3.4% y/y when using the standard EU calculation and 3.9% using the Federal Statistics Office’s standard approach.[iii] Many analysts we follow pointed to the country’s well-documented supply chain issues, which are starting to hamper factory output in some industries—driving prices higher as customers compete for a limited supply of goods. With no end to these issues in sight, they argue, it is no longer fair to call higher inflation “transitory,” which is the word monetary policy institutions like the European Central Bank (ECB) use frequently to describe economic developments they don’t think are likely to last.

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The Overlooked Lessons at Jackson Hole

US Federal Reserve (Fed) Chair Jerome Powell virtually delivered his much-anticipated speech at the Kansas City Fed’s annual Jackson Hole monetary policy party last Friday. As many observers we follow expected, he pretty overtly hinted the Fed is heading towards slowing quantitative easing (QE) asset purchases—i.e., tapering—this year. Loads of financial commentators we follow see QE as crucial fuel for equities and the economy, and many have hyped this proclamation as a watershed moment. But, no shock to us, the news didn’t seem to faze markets one bit. In our view, this further demonstrates the near-constant coverage of the Fed and other monetary policy institutions common in financial publications we cover is overdone. In our view, the Fed, Bank of England (BoE) and other monetary policy institutions simply aren’t as powerful as many believe—worth remembering amidst calls to give them even more responsibilities.

In past communications, the Fed has tied changes to monetary policy to the state of the US economic recovery. Powell often referred to the need for “substantial further progress” in things like lowering the unemployment rate before even considering any adjustments.[i] His Friday speech implies that hazy distinction has been hit, with most coverage we read focusing on this particular section:

My view is that the ‘substantial further progress’ test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.[ii]

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Why Terrorism Doesn’t Terrorise Markets

Amidst all the gut-wrenching images and stories emerging from Afghanistan, equity markets globally have largely held steady—in our view, a testament to markets’ seemingly coldhearted ability to see through local tragedies and continue pricing in the world’s economic future.[i] Encouragingly, we haven’t seen commentators argue the country’s destabilisation and Taliban control of American weapons and war materiel are directly negative for markets. But we have seen several claim there is an indirect impact that looms over the future, courtesy of the heightened risk of terror attacks in the West now that some geopolitical researchers we follow presume the Islamic State and Al Qaeda have safe quarter. They point to the US equity market’s severe reaction to the 9/11 World Trade Center attacks and warn of repeats. To be clear, the societal risk of terrorism is real and omnipresent, and attacks can destroy lives and property on an unfathomable scale. But for equities, we think the calculus is different, and as we will show, the past 20 years have demonstrated terrorism doesn’t cause lasting declines.

Perhaps counterintuitively, we think 9/11 both demonstrates this and explains why it is so. As Exhibit 1 shows, the MSCI USA Index plunged -11.5% between market close on 10 September and 21 September, the post-attack low.[ii] An attack of that scale on the World Trade Center and Pentagon was unprecedented and unexpected, a shocking tragedy that cut America deeply. This plus the associated uncertainty understandably is what sent markets reeling, in our view. But then the rout stopped, and in retrospect, we think it is easy to see why. People in lower Manhattan went back to work. Society pulled together and got on with it. It soon became clear that the economic effects weren’t huge—utterly disproportionate with the impact on thousands of families and the national psyche. Business continued. Markets callously accepted the reality that terrorism was part of our lives, and moved on. Just 19 trading days after 9/11, markets regained 10 September levels.[iii] The MSCI USA Index finished the year higher than its pre-attack level. The bear market that had begun back in September 2000 would last until October 2002 as investors continued dealing with the dot-com bubble’s implosion and other related issues our research has pointed to, but 9/11’s negativity was a small pocket. (A bear market is a broad, lasting equity market decline of -20% or worse with an identifiable fundamental cause.)

Exhibit 1: US Equity Markets and 9/11

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Sector Check-In: Global Energy Shares

Global equities have kept clocking new highs through the summer, but one sector is notably absent from the party: Energy, which also happened to be the best-performing sector in 2021’s first half.[i] Amongst financial commentators we follow, that hot start fanned widespread expectations that vaccines, reopening, resurgent travel and a new Roaring Twenties mirroring the 1920s’ global economic upswing. Many commentators we follow predicted this would stoke vast demand for fuel, making oil-related shares surefire winners for a long while. Yet now Energy has returned to earth somewhat.[ii] We don’t think dismal times are likely in store for the sector, but its recent travails show the danger in extrapolating hot performance forward.

Energy’s 34.1% return through mid-June far outpaced the MSCI World Index’s 9.6%.[iii] Propelling this move, in our view: oil prices, which our research indicates are Energy’s main driver. Brent crude oil climbed from about $50 (£37) a barrel at 2021’s start to over $75 (£57) in July.[iv] Throughout that stretch, commentators we follow claimed countries’ reopening from COVID lockdowns and rebounding travel would send demand soaring. In their view, coupled with American shale drillers’ and OPEC’s seemingly newfound production discipline, limited supply would supposedly keep oil prices elevated.

This all sounded a bit overstated to us. Yes, easing lockdown restrictions likely raises demand, but in our view, probably only back to a pre-pandemic normal. After an initial pop, we didn’t think extrapolating accelerating growth forevermore appeared wise. Then, too, in markets, economic theory holds that higher prices invite greater production. Maybe at a lag, but with the Middle East’s abundant proven reserves and America’s ready supply of drilled but uncompleted wells, global production seemed quite likely to rise before too long.[v] This in turn seemed likely to keep a lid on oil prices—and Energy shares, as our research shows oil producers’ earnings are more sensitive to oil prices than production volumes.

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Quick Hit: German GDP

With Afghanistan and Delta still hogging most headlines in the UK Tuesday, there was little new for investors to mull over. Enter Germany, which reported the details of its Q2 2021 gross domestic product (GDP, a government-produced measure of economic output). In our view, a quick look at how GDP’s various components fared can help investors put the widespread reports of global supply shortages and shipping delays in a helpful context.

Many commenters we follow portray Germany’s economy as uniquely vulnerable to the shortages of various raw materials and components, tied to its reputation as Europe’s industrial powerhouse. The country’s reputation as a large exporter also makes it vulnerable to the widely reported delays at various ports, not to mention the shortage in shipping containers and high sea freight rates. That is the backdrop for Q2’s report, which gave investors their first clear look at how these issues are affecting Germany’s economic recovery from COVID thus far.

Overall, we think the results do show some impact, but not large enough to derail the recovery—at least not yet. GDP grew 1.6% q/q, slightly faster than the initial estimate of 1.5% q/q.[i] Consumer spending led the charge with a 3.4% q/q rise, confirming the Federal Statistics Office’s earlier observations that services did the heavy lifting whilst global supply chain chaos hampered manufacturers.[ii] Yet in heavy industry, it wasn’t all bad news. Business investment in capital equipment eked out 0.3% q/q growth, and exports rose half a percent.[iii] Imports, which statisticians subtract from GDP to focus the gauge on single-country output but, in our view, represent domestic demand—as well as shipping activity—rose 2.1%.[iv] So, following the pattern in other developed nations—including the UK—supply shortages and shipping delays remained a surmountable obstacle in the quarter.

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Can the Federal Reserve Smelt Steel?

One year ago, US Federal Reserve (Fed) Chair Jerome Powell unveiled a change to the Fed’s inflation targeting objectives, culminating a multi-year strategy review process. That review stemmed from the Fed’s chronic failure to hit its 2% y/y inflation target, installed in 2012, with price increases throughout the 2010s deemed too low.[i] The solution announced a year ago: Instead of targeting 2% inflation in every given month, they would now target “inflation that averages 2% over time.”[ii] They didn’t unveil a precise formula or define “over time,” leaving many financial commentators we follow to presume the Fed would tolerate a spell of relatively hot inflation if the long-term average over some arbitrary period was 2%. There was some cheering at the time, but that was before US Consumer Price Index inflation spiked over 5% y/y and the Fed’s targeted gauge, the Personal Consumption Expenditures price index, hit 4%.[iii] (Both indexes aim to measure price changes across the broader landscape of goods and services.) Now many commentators are calling for the Fed to change tack again, either going back to the old targeting system or clarifying precise boundaries. In our view, this all misses the point greatly, as our research indicates there is little the Fed can do about the issues driving prices now—a point we think investors benefit from understanding.

We agree with the broad school of thought that views inflation, defined as a broad, consistent increase in prices across the entire economy, as a monetary phenomenon—too much money chasing too few goods. This, the Fed can theoretically influence with short-term interest rates, which it can raise or lower to flatten or steepen the yield curve (a graphical representation of a single issuer’s interest rates across a range of maturities), respectively. (The Bank of England and European Central Bank (ECB) operate in much the same way.) In a modern system like the US or UK, banks create most new money by holding only a fraction of every new loan in reserves, so fast lending generally speeds money supply growth (and vice versa). When yield curves are steep, with long rates comfortably above short rates, banks’ core business model—borrowing at short-term rates and lending at long-term rates—generally becomes more profitable. Our research shows that makes lending more attractive for banks, so they do more of it, and money supply grows swiftly. When the yield curve is flat or even inverted, we think aggressive lending becomes much less profitable. Banks tighten their belts. Our research has found this slows or, in some cases, reverses money supply growth. Eventually, we think those money supply changes feed through to prices.

It may be tempting, therefore, to look at last year’s money supply spike and think that was the trigger for today’s high American inflation rates.[iv] But money supply isn’t the only monetary variable. We think velocity—the rate at which money changes hands—also matters a great deal. If supply is up while velocity is down, they can offset each other at least partially. We think that is mostly what happened last year. Velocity tumbled as lockdowns blocked sales and hit incomes.[v] The Fed’s big money supply increase mostly offset that plunge, in our view.

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Inside China’s July Slowdown

Was it Delta, flooding or a deeper economic problem? That is the question several financial commentators we follow scrambled to answer this week, after China’s July economic data missed expectations. Retail sales and industrial production grew at what most other nations would likely consider a fine clip (8.5% y/y and 6.4% y/y, respectively), but both slowed sharply from June.[i] So did exports and imports, released earlier this month. Most of the commentary we read arrived at the conclusion that the escalating battle with the Delta variant and flooding in central China had only a modest impact on July’s results, with deeper troubles explaining the rest. We agree the tragic floods and Delta alone likely don’t explain the disappointing data, but we don’t agree with the implication that a faltering China is about to impede the global recovery from the pandemic or present a material headwind to the publicly traded companies deriving significant revenue there (which includes several FTSE 100 names).

For a few months now, the general consensus amongst commentators we follow has held that China’s economic recovery rests on heavy industry, with consumers and services struggling. That allegedly points to weak domestic demand, as factory activity continues getting a boost from the developed world. In our view, that explanation is too simple and ignores all of the distortions at play within China and globally right now.

Central flooding and the Delta variant of the virus that causes COVID-19 are two of those distortions, of course. Zhengzhou, the capital of flood-ravaged Henan province, is one of the country’s major manufacturing hubs, which we think likely explains industrial production’s slowdown partly. Flooding also complicated the city’s efforts to curtail a Delta variant outbreak, but other major cities (e.g., Nanjing, Wuhan, Yangzhou and Zhuzhou) have all reportedly entered partial lockdowns in recent weeks, likely curbing economic activity.[ii] Outbreaks also closed multiple ports this summer, hampering trade. Then, of course, there is also the global shortage of several raw materials, which various industry surveys show has hit manufacturers in China and the developed world alike.[iii]

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An Investor’s Guide to September’s Developed Market Elections

Editors’ note: Our election commentary is intentionally nonpartisan. We don’t favour any party or politician as we think political bias blinds and leads to investing mistakes. Thus, we analyse political developments only for their potential market impact.

After a relatively quiet year election-wise in developed markets, political activity will pick up next month. Postal voting has already begun for Germany’s 26 September federal election. Over the weekend, Canadian Prime Minister Justin Trudeau called for a snap election on 20 September. Norway goes to the polls 13 September to elect a new Parliament. Meanwhile, the spectre of a snap election looms over Japan. In our view, the outlook for political gridlock is likely markets’ main consideration: How active (or inactive) will governments be following election results? According to our research, inactive governments decrease markets’ legislative risk aversion, as there is less likelihood of new laws creating winners and losers. More active governments, by contrast, generally raise uncertainty, which our research indicates can dampen equity returns.

Whilst the outcomes remain unclear, here is what we think investors should look out for during a busy month of elections.

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The Cool Down in July’s US Inflation Data

In what now seems like a monthly ritual, financial publications we follow globally spilled a ton of ink on the US’s July Consumer Price Index (CPI) report last week. (CPI is a government-produced broad measure of consumer prices across the economy.) It showed the headline inflation rate remaining at 5.4% y/y, leading a number of outlets to bemoan inflation’s apparently digging its heels in.[i] Other outlets we follow noted month-over-month price gains slowed to 0.5% from June’s 0.9%, acknowledging recent hot inflation rates seemed to be moderating.[ii] Yet many still seemingly went fishing for reasons to argue American consumer price trends are a long way from normal. In the UK and Europe, where reopening happened later than in the US, many financial commentators we follow portray the US’s experience as a harbinger of bad things to come on their side of the Atlantic. Yet in our view, the latest data have some encouraging takeaways. We do still see some signs of post-lockdown weirdness in the data, but in some ways, trends already appear to be back at normal. We think equity and fixed interest markets likely saw this coming months ago, but perhaps a quick look at the data will help you have more confidence that rising share prices and falling long-term interest rates haven’t been wrong.

Last month we highlighted the major categories driving June’s big consumer price increase: food, energy, hotels, used autos and transportation services. The first three of those remained sizable contributors to US CPI’s month-over-month increase in July, rising 0.7% m/m, 1.6% and 6.8%, respectively.[iii] Used auto prices stalled, however, decelerating sharply from June’s 10.5% m/m gallop to July’s 0.2% crawl.[iv] Transportation services detracted, falling -1.1% m/m as auto rental prices fell -4.6%, auto insurance slipped -2.8% and airfares inched down -0.1%. All of these figures suggest the surge of pent-up demand following the removal of America’s lockdowns is still affecting travel-related items, whilst shipping headaches still appear to be hindering the food supply chain and driving prices up. Yet we think the auto-related hiccups appear to be evening out, as July’s data suggest rental companies have largely finished rebuilding their fleets, allowing them to slash fares and cease contributing to the upturn in used auto prices.

What really jumped out at us in July’s report was the shelter component, which rose 0.4% m/m and contributed over one-fourth of CPI’s monthly rise.[v] Hotels contributed about half of that. The other half came from rent. Not rent of primary residences, which is what we imagine most people actually think of when they think of rent. That figure rose 0.2% m/m, and it is only 7.6% of the total CPI basket, making its impact on headline inflation negligible in July.[vi] The real culprit: Owners’ equivalent rent (OER), which rose 0.3% m/m and is a whopping 23.6% of the CPI basket.[vii] Owners’ equivalent rent isn’t real—it is the hypothetical amount homeowners would pay to rent their own home, if they rented instead of owning it. Yes, you read that right, nearly one-fourth of the CPI basket is imaginary. It is not something anyone ever pays. It is instead a crude stand-in for home prices, which are an investment, not a capital good, and therefore excluded from CPI. We will leave it to you whether it is sensible to put this made-up service in CPI, but it is there nonetheless.

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The Lasting Lesson From Great Britain’s Household Energy Price Caps

Households across Great Britain received some rather grim news on Friday, when Energy regulator Ofgem announced the household energy price cap for England, Scotland and Wales will rise again in October. At that time, the BBC reports, “The typical gas and electricity consumer is likely to see their bill go up by £139 to £1,277 a year.”[i] Further analysis in The Guardian points out that for many households, energy costs will therefore be the highest in a decade, and it profiles several families for whom this presents hardship.[ii] We surely empathise with this, and we think it also illustrates one of the biggest ironies surrounding official price controls, like the energy price cap: They often have the opposite of their intended effect. In our view, this is a core concept for investors, as understanding price controls’ unintended consequences can improve overall economic analysis (and, by extension, investment decision making).

The current price controls, enacted in 2019, are mostly a bipartisan effort. As several commentators reminded readers on Friday, energy price caps originally appeared in Labour’s election manifesto in 2017 before becoming official government policy under Conservative Prime Minister Theresa May. We reiterate this not to point fingers, but because it illustrates what we think is a crucial point: No political party is inherently beneficial or detrimental to the economy and equity markets. Both parties have passed policies investors might consider good or bad for businesses, and sometimes the parties borrow ideas from each other. This is why we think investors benefit most from a party-blind approach, focusing on policies rather than personalities or partisan ideologies.

In theory, price controls aim to prevent prices from rising much. In the early 1970s, policymakers in the US and UK used them broadly in hopes of curbing accelerating inflation. It didn’t work, as a large array of research and our own historical analysis shows. Inflation rates accelerated throughout the decade as rising costs forced policymakers to repeatedly raise and eventually abandon the price controls.[iii]

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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.