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.

OPEC+, Revisited

On Sunday 2 April, the Organization of the Petroleum Exporting Countries (OPEC) and the countries that partner with it on supply targets—collectively known as OPEC+—upended a pleasant weekend by announcing they would cut production quotas by 1.66 million barrels per day.[i] Brent crude oil prices jumped that Monday, notching their largest one-day jump since March 2022, when Western sanctions against Russia prompted many commentators we follow to warn of potentially severe supply disruptions.[ii] After early-April’s announcement, most headlines we encountered asserted further rises were likely to follow, with calls for $100 per barrel or higher common. But as we wrote then, this seemed hasty, considering OPEC+ had long undershot production targets and past quota cuts hadn’t much dented output.[iii] And now? Few commentators we follow seem to have noticed, but oil has erased that spike and then some, which we think has the wind out of Energy stocks’ sails in the process. We doubt they regain leadership in the near future.

Exhibit 1 shows Brent crude oil prices this year to date. As you will see, they have been pretty bouncy, but earlier spikes didn’t last. OPEC+’s announcement arguably triggered a larger move, but it was similarly short-lived as markets seemed to realise quickly it wouldn’t materially change global supply and demand.

Exhibit 1: Oil’s Round Trip

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Monetary Policy Institutions Hike Again, But the Thrill Appears To Be Gone

A handful of monetary policy institutions hiked benchmark rates this week. The Reserve Bank of Australia raised its cash rate target 25 basis points, or bps (0.25 percentage point, or ppt) Tuesday, bringing it to 3.85%.[i] The US Federal Reserve (Fed) also raised its benchmark rate by another 25 bps Wednesday, bringing the fed-funds target range to 5.0% – 5.25%.[ii] And rounding out the rises, the European Central Bank (ECB) hiked its benchmark rate bps Thursday, bringing it to 3.25%.[iii] From publications we read and market-based indicators we follow, it appears the world had largely already pencilled these moves in, which may be why a slight tweak to the Fed’s statement grabbed most of the attention from commentators we follow, fuelling their assertions that the Fed is likely done for now. As always, we wouldn’t read into the Fed’s words. But whether the Fed or other monetary policy institutions are done or keep hiking, we doubt it means much for stocks.

In past statements, the Federal Open Market Committee (FOMC, the cadre that makes US monetary policy decisions) has included this language: “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”[iv] This time, the first of those two sentences was gone, whilst the second returned with some slight modifications. Even though it referenced the potential for future tightening, the absence of the “some additional policy firming may be appropriate …” bit is ratcheting up commentators’ theorising that the era of rate hikes is over.[v]

Maybe it is. Back when the Fed raised interest rates in 2004 – 2006, 5.25% was the peak fed-funds rate.[vi] In his post-meeting press conference, Fed head Jerome Powell also acknowledged that the tighter credit conditions following the failures of Silicon Valley Bank, Signature Bank and now First Republic had done some of the FOMC’s work for them. “We won’t have to raise rates quite as high as we would have if this had not happened.”[vii] But also, we think it is entirely possible they keep going. Powell reiterated the Fed’s time-honoured mantra that decisions are data-dependent. The statement stressed that point, too. Who knows how the 11 FOMC members will interpret the data arriving between now and June’s meeting. Or even what data they exactly emphasise or disregard, and what they think said data should do ahead. Or how that will all evolve by July’s meeting and beyond. Anything is possible, and you can’t predict it in advance. Case in point: Australia’s aforementioned rate hike followed a pause at its March meeting. None of this is on a preset course.

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US Q1 GDP Better Than Commentators We Follow Appreciate

Although US gross domestic product (GDP, governments’ measure of economic output) rose 1.1% annualised in Q1, it missed consensus expectations for around 2%.[i] Commentators we follow widely proclaim this slowdown is—at long last—a prelude to the recession (broad-based decline in economic activity) they have forecast for quarter after quarter now. But we find a look under the bonnet reveals underappreciated private sector resilience—the very fuel that we think has propelled global stocks in their recovery.[ii] Whilst these data are all backward looking, we think it shows sentiment surrounding economic growth remains excessively dire, which we find is often the case as bull markets (prolonged periods of rising equity prices) begin.

Overall GDP growth rates frequently obscure moving parts below the surface—movement that we find can tell you much more about the economy than the headline number alone. Hence, we think it helps to look at GDP’s underlying components to put growth trends in context. As Exhibit 1 shows, inventory change (maroon) was the main detractor in Q1, lopping a large -2.3 percentage points (ppts) off headline GDP growth—the most since Q1 2021’s drawdown as US goods consumption surged.[iii] For some broader perspective, consider: In the 120 quarters from Q1 1990 to Q4 2019—the eve of the pandemic—inventory change detracted more than this just 4 times.[iv]

Exhibit 1: US GDP’s Combined Private Sector Demand Components Accelerated

Source: US Bureau of Economic Analysis (BEA), as of 28/4/2023. Real GDP and components, Q1 2022 – Q1 2023.

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A Market-Orientated View of the EU’s World-First Carbon Border Tax

Editors’ note: MarketMinder Europe doesn’t advocate for or against any government initiative. Our aim is only to diagnose policies’ potential economic and market impact.

The world’s first carbon border tax became EU law this week.[i] Whilst not technically a tax in the traditional sense, this new mechanism aims to force importers to buy certificates based on their estimated carbon footprint.[ii] There is a wide range of views on this policy. But importantly for investors, it looks smaller than most commentators we follow portray and, after years of negotiation, its formal, gradual implementation doesn’t seem likely to upset markets, in our view.

The European Parliament and the 27 EU member countries agreed a climate deal in December, including the Carbon Border Adjustment Mechanism (CBAM).[iii] Last week, EU lawmakers passed draft legislation, which the European Council—comprising heads of member state governments, European Commission President Ursula von der Leyen and European Council President Charles Michel—approved Tuesday.[iv]

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More Signs Recession Isn’t Certain

Q1 gross domestic product (GDP, a government-produced measure of economic output) results for major economies have started trickling out: Eurozone GDP rose 0.1% q/q, and the currency bloc’s four-largest economies didn’t report contraction in Q1.[i] Financial publications we follow noted the Continent has thus far managed to avoid recession (a period of contracting economic output), and some more recent indicators suggest growth continued in April: Namely, S&P Global’s flash purchasing managers’ indexes (PMIs), which hit the wires last Friday. They add further evidence this year’s economic reality is better than projected—the central force behind global stocks’ rally since last June’s low, in our view.[ii]

April’s flash PMIs for major developed economies showed overall growth in April, though they were mixed on a sector basis. PMIs are monthly business surveys where readings above 50 imply expansion whilst below 50 imply contraction. Whilst services all topped 50 this month, manufacturing was mostly under that mark. (Exhibit 1) These are just surveys, and they measure growth’s breadth rather than its magnitude, but they are consistent with recent trends.

Exhibit 1: A Look at the Latest PMIs

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Inside the UK’s Inflation Divergence

Several developed economies released data measuring inflation (broadly rising prices across the economy) this week, with both Canada and the eurozone seeing their sharp inflation slowdown continue in March. On Tuesday, Statistics Canada reported the Consumer Price Index (CPI, a government-produced index tracking prices of commonly consumed goods and services) clocked in at 4.3% y/y, extending the improvement from last June’s 8.1% peak.[i] The eurozone’s final March estimate confirmed the flash reading at 6.9% y/y, continuing the trip down from October’s high of 10.6%.[ii] But the UK’s readings remain stubbornly higher, as March inflation remains lodged in double digits.[iii] Despite economists’ projections of a drop to 9.8% y/y from February’s 10.4%, it fell only half as much, hitting 10.1% in March—and down just one percentage point from October’s 11.1% peak.[iv] The path has also been more volatile, with a temporary reacceleration in February.[v] Fisher Investments’ research suggests stubborn inflation has contributed to particularly low sentiment across Britain. But there, too, improvement appears to be on the horizon, which could help propel stocks up the proverbial wall of worry bull markets (long periods of generally rising stock prices) are often said to climb.

In our view, the UK’s inflation divergence stems largely from energy policy. In Canada and the US, energy prices are market-set, leading to rapid improvement on the consumer front as wholesale fuel and power prices fell.[vi] Several European nations subsidised energy at the provider level, keeping the full cost increases from filtering through to consumer prices.[vii] Yes, the UK did too, but it also capped household energy prices.[viii]

The cap initially reset semiannually—every April and October—and Fisher Investments’ research finds it quickly became a price target. Accordingly, household energy costs have jumped in big stairstep increments every six months, and providers haven’t yet passed reduced wholesale costs to consumers.[ix] Further complicating matters, the government is paying the difference between its own price ceiling and the energy regulator’s cap, so households won’t start seeing a decline until the regulatory cap—currently at an average annual cost of £3,280—falls below the government’s £2,500 average annual cost ceiling … or until the government’s assistance expires in April 2024, whichever comes first.[x]

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China's Reopening Speeds Growth Along

Has the global economy shifted up a gear in Q1? Last year, gross domestic product (GDP) in China—a key engine component of the global economy, in our view—mostly sputtered as major Chinese cities dealt with an array of COVID restrictions.[i] (GDP is a government-produced measure of economic output.) Growth slowed across most indicators, and Chinese GDP grew an anaemic 3.0% in the full year.[ii] But now those restrictions are gone, monthly indicators are heating up and China’s GDP has already reaccelerated to 4.5% y/y in Q1.[iii] It may not soar from here, as Fisher Investments’ research shows the initial reopening rebounds tend to be short, but in our opinion, China will likely keep contributing nicely to global GDP, which we think is likely to give global stocks a nice assist.

Whilst economists’ consensus projections were for China’s GDP to accelerate in Q1, the magnitude surprised. Consensus estimates were for growth to speed from Q4 2022’s 2.9% y/y to 3.4%.[iv] That makes the 4.5% growth rate one of the biggest beats we have seen in a long time. Under the bonnet, it appears the positive surprise stemmed from the services sector. March industrial production grew, but at 3.9% y/y it missed analysts’ expectations for 4.8%.[v] Meanwhile, exports soared 8.4% y/y in Q1.[vi] But retail sales’ 10.6% y/y growth smashed economists’ expectations for 7.0%.[vii] Encouragingly, the reaction to this from commentators we follow was largely dim—suggesting a phenomenon we call the pessimism of disbelief, in which commentators mostly dismiss or ignore good news during a young stock market rally, is alive and well. We have found this to be a common feature of new bull markets (long periods of generally rising stock prices). In addition to bemoaning industrial production’s miss, publications we read warned that March purchasing managers’ indexes (monthly surveys that track the breadth of economic activity) indicate Q1’s export boom probably won’t last—implying heavy industry is China’s economic engine. But in reality, services has that distinction, as it is the largest economic sector in China.[viii] Services also happened to grow 5.4% y/y in Q1, outstripping heavy industry’s 3.3% rise.[ix]

If the largest piece of China’s economy is growing the fastest, that is good news, in our view. It also fits with the government’s long-running goal of services generating most of the economy’s growth, on the presumption that this is more sustainable in the long run than heavy industry powering everything.[x] That always seemed logical to us, considering China’s low-end manufacturing edge appeared to begin eroding long ago amidst higher wages and shipping costs.[xi] Other developing nations are now carrying more of the world’s factory load whilst China’s economy matures and relies more on domestic demand for growth.[xii] In our view, that makes its contributions to global growth less circular—and potentially boosts its clout as an end market for developed-world companies. We think that is probably great for companies’ future earnings.

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February GDP: Not Great, but Still No Recession

Another month in the books, and the UK recession (a period of contracting economic output) many economists have projected still hasn’t materialised: February monthly gross domestic product (GDP) was flat, levelling off after January’s upwardly revised 0.4% m/m rise.[i] Under the bonnet, the results were even more encouraging, in our view. We doubt it is a surprise for stocks, given the UK has materially outperformed global markets over the past half year, but we think it is worth a quick look to see what markets may have been factoring into prices.[ii]

At first blush, February might look like a bit of a setback considering growth in construction offset small declines in heavy industry and services.[iii] The latter fell -0.1% m/m, inching back after January’s 0.7% jump.[iv] But the decline doesn’t appear to have come from weakening demand. The largest detractor was education, down -1.7%, largely because of teacher strikes.[v] Industrial action also hampered public administration and transit services.[vi] We say this without judgment, mind you—just pointing out the facts as reported also by the Office for National Statistics.

In the services categories our research finds to be more sensitive to customer demand, the results were strong, in our view. Wholesale and retail trade rose 0.1% m/m, adding to January’s 0.6% rise.[vii] This echoes strength in retail sales reports, which showed sales volumes rising recently.[viii] Some commentators we follow dismissed this as a figment of retailers’ discounting merchandise, but we recall the same crowd warning of trouble when sales volumes slipped amid higher prices last year. In our view, you can’t have it both ways. If consumers are regaining buying power, we find that is generally a good thing. Accommodation and food services output rose 0.3% m/m, suggesting people are starting to go out more—another thing inflation appeared to curb last year.[ix] We think the 1.6% m/m rise in arts, entertainment and recreation output echoes this, especially as that category has now moved past the skew from when the World Cup paused Premier League football last year.[x] Meanwhile, real estate services output was flat, suggesting some stabilisation after spiking mortgage rates slammed the industry late last year.[xi]

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Is Gold Signalling De-Dollarisation Looms? We Doubt It.

In the 20th century, the US dollar gradually overtook the pound as the world’s main reserve currency. Lately, commentators we read say they see signs the dollar’s time is now up with more international trade being conducted in non-dollars, like the Chinese yuan and Indian rupee, and gold the apparent beneficiary. Many are citing a chart and argument making the rounds—and implying this is a potential destabilising force for the global economy. We think such theories are beyond a stretch, as we will show.

The chart in question supposedly shows a breakdown in the inverse relationship between America’s index-linked 10-year Treasury Inflation-Protected Securities (TIPS) yield and gold in USD—which some commentators we follow take as a sign the dollar is losing its reserve currency status. (Exhibit 1) Both theoretically attract money as inflation rises, presumably leading TIPS yields to fall (and prices to rise) as gold climbs—and vice versa when inflation fades. But over the last several months the link has allegedly weakened, with TIPS yields up almost three percentage points over the last year to levels last seen in 2010, whilst gold (in dollars)—though lower—remains near the high end of its range over this period.

Exhibit 1: Fun With Spurious Correlations, Part I

Source: FactSet, as of 4/4/2023. 10-year TIPS yield and gold price per troy ounce, 3/4/2007 – 3/4/2023. Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.

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Oil’s OPEC+ Plus Sign Probably Not Assured to Last

After the Organization of the Petroleum Exporting Countries and its partners (collectively known as OPEC+) announced a surprise production quota cut Sunday, crude oil prices jumped on Monday, and commentators we follow raised inflation concerns once again.[i] Most commentary we read focussed on the scale of crude’s intraday rise. But even with Monday’s price movement, crude prices remained below levels seen at this point last month—and well off last year’s highs.[ii] Couple that with OPEC’s recent failures to meet quotas, and we are struggling to see why some seem so worried.[iii] In our view, this looks much more like a scare story—which our research finds are abundant early in bull markets (long periods of generally rising equity prices)—than a fundamental reason for stocks to tumble to new lows from here.

When OPEC+ nations get together, they theoretically assess global demand, production in the US and other non-cartel nations, and then set production targets at a level they anticipate will balance supply and demand. In October, they caused a stir amongst commentators we follow by announcing voluntary cuts that would reduce production by 2 million barrels per day (bpd) beginning in November and lasting through 2023.[iv] Prices bounced higher initially … then fell.[v] Sunday’s announcement added another voluntary 1.66 million bpd reduction, which includes Russia’s plans to cut output by 500,000 bpd in the face of tighter Western sanctions.[vi] OPEC+’s announcement states these cuts are “aimed at supporting the stability of the oil market.”[vii] But most coverage we observed portrayed this as the cartel piling production cuts on top of production cuts in an attempt to boost crude prices. We think that rhetoric, coupled with Brent crude’s nearly $5 jump on Monday, resurrected inflation worries.[viii]

In our view, this is all a bit hasty. For one, even with Monday’s jump, crude is down significantly from 2022.[ix] Prices closed Monday well below their spike after October’s production cut announcement.[x] Then, Brent crude temporarily flirted with $100 per barrel before falling in November and December.[xi] It closed Monday around $85, in line with prices throughout December, January and February, and hovered around there through Wednesday.[xii] If energy prices then were disinflationary, we don’t see why they would suddenly be some massive consumer price booster now.

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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.