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.

Update: The Latest on the EU and Russian Oil

The EU and Russia’s ongoing economic battle over fossil fuels continues—this time with Germany signalling it is willing to support an EU ban of Russian oil imports.[i] Or at least, that was the most common summary of the situation from commentators we follow, but we think that is a touch oversimplified. Whilst we don’t dismiss the risk of sanctions—whether an EU embargo or Russian halt—likely causing a severe energy crunch and European recession, we think the chance of Europe implementing a sudden, recession-inducing ban still appears quite low.

Importantly, Germany did not suddenly bless an instant embargo. Rather, it said it would support a gradual, phased-in ban.[ii] It also argued against some of the other measures EU officials have posed, including tariffs, unilateral price cuts and forcing energy companies to place their payments to Russian suppliers in escrow, on the grounds that these measures could prompt Russia to ban all EU oil exports instantly.[iii] The debate amongst EU leaders is ongoing, and we think it remains to be seen what—if anything—they will agree on, especially after Hungarian officials reiterated their opposition at the weekend.[iv]

We think one big reason Germany is lobbying for a gradual ban with a long runway is largely the same reason an immediate cessation of Russian purchases risks causing economic harm: refining capacity. Not all oil is created equally. Different strains of crude have different densities (ranging from light to heavy) and sulfur content (ranging from sweet to sour). Russia’s Urals oil blend is a cocktail of light sweet and heavy sour crude. Russian imports fuel (pun intended) about one-fourth of daily EU oil consumption, which means somewhere around one-fourth of EU oil refining capacity—give or take—is likely geared to this rather unique blend.[v] At a high level, we see two ways to substitute this. Either the EU finds alternate sources of oil that have similar density and sulfur count as Urals oil, or Energy firms reconfigure their refineries to process either heavy sour or light sweet crude, depending on which producers they buy from (or, of course, some combination of the two).

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The Low-Down on Q1’s US GDP Downtick

Editors’ Note: MarketMinder Europe doesn’t make individual security recommendations. Any stock mentioned herein is merely incidental to the broader topic we aim to highlight.

Thursday morning, the US Bureau of Economic Analysis (BEA) released the advance estimate of US Q1 2022 gross domestic product (GDP, a government-produced measure of economic activity), which contracted -1.4% annualised.[i] Coming against expectations of 1.1% growth and amidst widespread recession fears amongst financial commentators we follow, this result likely surprises many and may add to what we perceive to be widespread recession worries.[ii] Yet under the surface, we find little here surprising—or troubling for stocks. Let us show you.

First, consider the details. The purely private-sector GDP components—consumer spending and investment in non-residential structures, equipment, intellectual property and housing—rose and accelerated from Q4 2021, when headline GDP grew 6.9% annualised. (Exhibit 1)

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Weighing Russia's Gas Halt to Poland and Bulgaria

After threatening for weeks to cut off natural gas flows to European countries who don’t pay in roubles, Russia has officially halted flows to Poland and Bulgaria.[i] Several commentators we follow warn this raises the likelihood of a European recession (a broad decline in economic activity), especially if it is a prelude to stopping flows into Germany and other big Russian clients. Let us take a look and assess the likely impacts—for the affected countries, Europe and global stocks.

Russian President Vladimir Putin has jawboned for over a month about requiring his “unfriendly” customers to pay for natural gas in roubles rather than euros or dollars, signing a formal decree mandating this at March’s end.[ii] This might sound like a strange move for a country that needs dollars and euros to continue servicing its foreign debt and can’t access most of its international reserves due to sanctions. But Putin and Central Bank of Russia (CBR) head Elvira Nabiullina are also trying to support the rouble. Those purchasing Russian gas in roubles will have to buy those roubles. Or, more specifically, it seems most are opening foreign currency accounts at Gazprombank (the state-owned financial offshoot of Russian natural gas giant Gazprom), depositing euros, converting those euros to roubles, and paying.[iii] So instead of the CBR spending down its reserves to buy roubles, it gets to import hard currency via Gazprombank whilst forcing European clients to effectively support the rouble. Putin then gets to use those same roubles to continue funding the war effort without having to fire up the printing presses and risk hyperinflation (rapidly rising prices across the economy).

That perhaps raises the question: Is this legal under sanctions? Gazprombank is subject to British and American sanctions, but not EU sanctions.[iv] Where the EU has sanctioned other large Russian banks, it exempted energy-related transactions—largely to keep natural gas and oil flowing. Gazprom has told customers its preferred payment mechanism doesn’t violate EU sanctions. Some EU leaders say it does, but Bloomberg reported Wednesday that 10 European energy companies had opened the required accounts and 4 had already paid in roubles.[v] Given the huge political and business risks at stake, we have a hard time envisaging companies opening these accounts and completing these transactions without consulting EU regulators, but stranger things have happened.

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Finding Flowers in Springtime Economic Data

Elevated inflation has dominated financial headlines we monitor over the past 12 months, and we have seen arguments that high prices along with the Russia-Ukraine war have delivered a big setback to the global economy. Last week the International Monetary Fund reduced its 2022 and 2023 global growth projections, following the World Bank and other private forecasters.[i] But some recent economic data from developed nations leads us to conclude reality likely isn’t as poor as many commentators we follow warn.

The Latest PMIs Still Say Growth

S&P Global’s April flash (preliminary) purchasing managers’ indexes (PMIs) implied ongoing economic growth in major developed nations. (Exhibit 1) PMIs are surveys measuring whether companies’ purchasing managers saw improvement or deterioration across a number of categories. Readings above 50 suggest expansion, although they measure only the rough percentage of businesses enjoying higher activity, not how much their businesses grew (or shrank) in aggregate.

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Our Perspective on April’s Return to Rocky Markets

War and atrocity. Food and energy price spikes. Widening Chinese lockdowns and supply chain disruption. Big swings in both stock and bond markets.[i] Thus far, based on our observations of investor sentiment and behaviour, we find 2022—which features this bull market’s (period of generally rising equity prices) first correction (typically a short, sharp, sentiment-driven -10% to -20% pullback)—has been difficult for many investors. After 8 March’s low, stocks rose to close the month, only to see renewed volatility in April send markets close to retesting that mark on Tuesday.[ii] Many commentators we follow warn worse lies ahead. But, whilst such volatile times like this can be hard, we think they aren’t atypical during corrections. To us, they call for calm—and perspective: Corrections are never easy, but as we will show, they are a normal part of bull markets. Patience is likely to prove beneficial, in our view.

Corrections are chiefly sentiment swings, which often start with some plausible seeming negative story, in our experience. In this case, it seems to us inflation, war and more recently China’s latest lockdowns underpin the move, with tragic news out of Ukraine stirring investors’ emotions alongside volatility. Our research shows being sentiment-driven gives corrections one of their toughest features: They are impossible to predict—and time. We aren’t aware of anyone with a proven history of circumventing sentiment-driven negativity and corrections. We also find such shifts happen suddenly; there generally won’t be any warning one is about to start—and no all-clear signal when it is over. The beginning and end are apparent in hindsight only.

But based on our historical research, there is a silver lining: Recoveries are usually about as fast as the drop, with stocks normally continuing to churn higher thereafter. Exhibit 1 shows all of America’s S&P 500 corrections since 1928 presented in US dollars, which we use for its long history. If the current correction resolves as others have—and we see little reason to think this time is different—the recovery to new highs and beyond could come much sooner than many commentators we follow seem to anticipate today.

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Political Uncertainty Falls in France

Editors’ Note: MarketMinder Europe favours no political party or politician, analysing developments solely for their potential market and economic impact.

Well that was anticlimactic. French President Emmanuel Macron cruised to victory over challenger Marine Le Pen in Sunday’s runoff, becoming the first French incumbent president to win re-election in 20 years.[i] Heading into the contest, polls put his lead in single digits, seemingly keeping the outcome in question.[ii] Yet the latest election returns put his margin at 58.5% to 41.5%.[iii] Some commentators we follow have expressed relief that France won’t be ruled for five years by a nationalist who touted far-left economic policy on the campaign trail. Others warn that Macron’s decision to tack left on economic policy whilst campaigning could herald a shift away from his first term’s alleged pro-growth reform bent. We think both viewpoints largely miss the elephant in the room: French presidents can’t do much without Parliament, and Parliament’s lower chamber, the National Assembly, holds elections in June. In our view, a break from the deep political gridlock that we observed for most of Macron’s first term seems unlikely. Whilst that probably prevents meaningful pro-growth reforms, we think it is also likely to reduce legislative uncertainty. That likely extends the status quo that French stocks have been fine with for years, in our view.

From the start, we didn’t think the presidential contest was likely to make or break stocks. Given Le Pen’s National Rally has had difficulties organising at the grassroots level, the likelihood it won a majority in June was exceedingly low, in our view.[iv] We think her economic agenda likely would have gone next to nowhere. She might have been a thorn in other EU leaders’ sides, but that probably would have amounted to far less than many commentators we follow warned. The European Council operates by consensus, and we have long observed that process to be messy, with holdouts holding plenty of influence. That the holdout would have come from the bloc’s second-largest economy wouldn’t have changed much beyond appearances, in our view.[v]

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Digging Into America’s Retail Sales

How are high petrol prices affecting the global economy? Many observers we follow have tried to answer that question by focusing on UK retail sales, which fell -1.4% m/m on an inflation-adjusted basis in March.[i] We agree those are worth a look, but we question how telling they are, considering we see a lot of pandemic-related skew lingering in UK economic data. So we think it is helpful to take a look at the world’s largest consumer market—America—which happens to be further along in the post-pandemic reopening process, for additional clues. US retail sales rose 0.5% m/m in March, but excluding petrol stations, they fell -0.3%, sparking stagflation concerns.[ii] Stagflation, or high inflation (an economy-wide rise in prices) amidst stagnant economic growth, often connotes 1970s-style economic malaise amongst commentators we follow, but we don’t think those comparisons—or the alleged ramifications for markets—are apt. Retail sales are only a subset of consumer spending, but in our view, the glimpse they give still shows America’s household demand holding relatively firm in the face of higher prices.

Exhibit 1 depicts the slight divergence between US retail sales with and without petrol spending last month. As pump prices hit a record-high US national average of $4.33 per gallon (87.71 pence per litre) in March, America’s petrol station sales soared 8.9% m/m, which drove its retail sales’ monthly gain.[iii] These figures aren’t adjusted for inflation, so we think it seems fair to say rising prices were responsible for much of the increase.

Exhibit 1: US Retail Sales’ Latest Wiggles in Perspective

Source: Federal Reserve Bank of St. Louis, as of 14/4/2022.

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A Global Roundup of Political Developments (Outside France)

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

When it comes to politics, pretty much all eyes in the financial world appear to be on Sunday’s French election. We will have more to say about that after the fact, but in the meantime, here is a cocktail of other political snippets (and what we think are their stock market implications) to wet your whistle.

Boris Johnson Pays Fine, Says Sorry, Remains Employed

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China's Lockdowns: Another Potential Source of Falling Uncertainty

If we were allowed just two words to sum up the reaction from commentators we follow to China’s Q1 gross domestic product release (GDP, a government-produced measure of economic output), they would be yah and but. As in, yah, that 4.8% y/y growth beat financial analysts’ expectations and is mostly in line with the government’s target, but that was before half the country went back into lockdown.[i] We think this is a fair point, and the risk of a contraction in Q2—which some financial commentators we follow now forecast—is also worth considering. In our view, China’s economic and COVID setbacks likely add to this year’s early uncertainty—yet we think they also create opportunities for uncertainty to fall later this year as early headwinds will likely fade. Our analysis shows high and falling uncertainty is often positive for stocks, and we think it is likely to be a tailwind as 2022 rolls through its back half.

Whilst we agree with those who state China’s Q1 data don’t give much insight into the latest lockdowns’ impact, we think the accompanying March monthly data offer some clues. Unsurprisingly, in our view, they show the restrictions hitting consumer activity hardest. Retail sales fell -3.5% y/y and -1.9% m/m, with the latter (and month-over-month data in general) featuring rather prominently in the National Bureau of Statistics’ (NBS) release.[ii] As always, we think it best to take that with a grain of salt, as China’s seasonal adjustment methodologies are young and unproven, but, in our view, it seems rather telling that official releases aren’t shy about presenting negative data. In years past, many of their releases have presented a more positive view, and financial commentators we follow have long suspected that the calculations used to adjust for inflation massaged the data, making them look better than they otherwise might. Before he became prime minister, Li Keqiang fed this suspicion, calling the country’s economic figures “man-made” and encouraging observers to look beyond headline data in order to get a true look at China’s economic health.[iii] Data releases presenting negative month-on-month data strike us as a break with this recent history. We think the presentation of these figures will also give us a chance to more clearly assess the damage as lockdowns spread from Shenzhen to Shanghai in late March, reaching dozens of other major cities in April.[iv]

Developments in industrial production will also be worth watching, in our view, as it held up fairly well thus far. Heavy industry grew 6.5% y/y in Q1 overall, with industrial production up 5.0% y/y in March.[v] It also eked out 0.4% m/m growth, but that coincides with the early parts of Shenzhen’s and Shanghai’s lockdowns, when factories were still managing to operate as bubbles and keep output flowing.[vi] More recent reports indicate supply chain troubles have prevented factories from getting components, so industrial production could very well take a hit in April.[vii] Same goes for exports, which jumped 10.7% y/y in Q1, including a 12.9% y/y rise in March (China doesn’t publish month-over-month trade data yet).[viii] If factories can’t assemble final goods for shipment overseas, then exports will probably weaken. Imports, however, we wouldn’t suggest reading too much into. Ordinarily, we would interpret their -1.7% y/y drop as a potential sign of weakening domestic demand, but the global supply chain weirdness that has companies opting to ship empty containers back to China rather than wait to load them up continues.[ix] In our view, that is probably skewing the data to an extent.

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How Predictive Are Dow Transport Stocks?

Does America’s Dow Jones Transportation Average (DJTA) know something broader markets don’t? According to some commentators we follow, it holds special magic, foretelling future broad market moves. But there is nothing special about transport-based gauges, in our view. We think stocks are stocks, and none are smarter than another set.

The DJTA consists of 20 stocks and, like its more famous 30-stock sibling, the Dow Jones Industrial Average (DJIA), is price-weighted.[i] We think this, plus the index’s including just a narrow sliver of the broader stock market, limits its usefulness. Price weighting means a member’s share price determines its weight in the index. But this is arbitrary, in our view. In a price-weighted index, a hypothetical stock ABC worth £100 with only 2 shares outstanding would have 10 times the influence of an imaginary £10 stock XYZ with 200 shares outstanding, even though the latter’s market capitalisation (stock price times number of shares outstanding) is 10 times bigger. Weighting stocks by alphabetical order makes about as much sense to us. That is why the market capitalisation-weighted FTSE 100 replaced the price-weighted FT 30 in 1984.[ii] The only good (historical) reason to price weight is easier calculation, in our view, but with the advent of computers, that ship sailed long ago. Still, Dow Averages’ quirky legacy carries on.[iii]

We think transportation’s market relevance is similarly overstated. Early in the Industrial Age, when railroad tycoons strode the earth, its economic might wasn’t questioned.[iv] In our view, transportation (and logistical) infrastructure remain important today—food and energy are, too; some of our favourite things! But as a percentage of the MSCI World Index’s market capitalisation, for example, Transportation is 2%—there are much more economically important sectors nowadays.[v] Despite the Dow Transports’ aura of historical importance, we think it is a mistake to overrate it, much less follow the alleged signals it sends about the American economy and stocks generally.

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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.