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.


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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The Latest Update on the EU and Russian Energy

Global energy markets got a big dose of seemingly bad news on Monday and Tuesday, with the EU announcing sweeping sanctions on Russian oil and Russia cutting off natural gas shipments to the Netherlands and some suppliers in Denmark and Germany.[i] And in response, oil and natural gas markets … didn’t freak out. Brent crude oil prices and Dutch TTF natural gas prices (Continental Europe’s benchmark) inched higher but remain below their recent peaks, which they set shortly after Russian troops invaded Ukraine and the US and UK unveiled their bans on Russian energy.[ii] Notwithstanding the potential for further volatility from here, the relatively muted reaction doesn’t totally shock us. As we will discuss, whilst the latest developments probably aren’t great from an economic standpoint, we don’t think they appear likely to result in outcomes worse than the widespread warnings from commentators we follow, which we think markets have already incorporated into share prices. Moreover, we think both moves will likely help put an end to questions over what will happen, which we suspect likely reduces uncertainty and helps markets move on.

Based on our reading, the EU’s measures, announced Monday, were both worse and milder than many commentators we follow suspected. Milder because whilst the EU announced it will ban all seaborne imports of Russian crude oil, the sanctions exempted shipments via pipeline in order to avoid handicapping landlocked nations, like Hungary, that don’t have the infrastructure to replace Russian crude.[iii] That gives the most Russia-reliant nations—and the bloc overall—some needed flexibility, in our view. But we think the measures are also heavier than more forecasts we saw projected, as they will ban all EU insurers from covering seaborne shipments of Russian oil—a provision that wasn’t a part of the initial public debate. Given European insurance companies presently insure the vast majority of tankers carrying Russian oil, this restriction aims to prevent Russia from continuing to sell discounted crude to China, India and other Asian nations.[iv] As we saw many observers note, this is likely the more important of the measures. If it worked exactly as intended and stranded Russia’s oil, we think it would probably have a material impact on global oil supply.

But that is sort of a big if, in our view. For one, these actions don’t take effect immediately, giving room for the global oil trade to readjust.[v] The insurance ban doesn’t come into force for six months. Two, it is unclear to us that banning EU insurers from covering tankers ferrying Russian crude will really take its oil off the market. European insurers may cover the majority of shipments for now, but they aren’t the only game in town. Insurers from nations that aren’t participating in sanctions, including India and China, could fill the void.[vi] Some observers suggest the Russian government could write its own insurance.[vii] Then too, Russia could simply ship more oil and gas to these nations via pipelines and rail, as these links are already established (and the former are expanding).[viii] Black and grey markets could even flourish, in our view. Maybe Russian crude makes its way to refiners and ports in other nations and takes to the sea in disguise. It isn’t even clear to us that Russian oil products are sanctioned, provided the refining or blending takes place in a third-party country like India.

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China Resumes Reopening

Investors got a fresh dose of Chinese economic data overnight Monday, this time with the official Purchasing Managers’ Indexes (PMIs) signalling continued contraction in May.[i] The rate of decline eased significantly from April, but it still doesn’t point to growth.[ii] That is what we consider to be the bad news. The good? Shanghai is lifting its lockdown, and life there started returning to a semblance of normal on Wednesday.[iii] Beijing also reportedly eased some curbs over the weekend.[iv] Local officials in Shanghai have also announced a raft of economic measures to help support a rebound.[v] Now, we don’t think any of this points to a rapid acceleration in Chinese gross domestic product (GDP, a government-produced measure of economic output) growth—but we also don’t think that is necessary for Chinese or global stocks at this point. Rather, we think the combination of reopening and targeted fiscal and monetary assistance is likely to help reality turn out better than the deeper malaise commentators we follow warn of—a positive surprise, in our view.

PMIs are what those who love economic jargon call soft data. They don’t report growth rates of actual output, which would be considered hard data. Rather, they are surveys measuring the percentage of businesses reporting increased activity in a given month. Readings over 50 indicate expansion and under 50 contraction—with growth and/or contraction theoretically getting faster the further readings get from 50. So from that technical standpoint, China’s May PMIs appeared to show some signs of stabilisation. The official manufacturing PMI rose from 47.4 in April to 49.6—still shrinking, but barely.[vi] The sub-index for large manufacturers even rose to 51.0, returning to growth.[vii] The non-manufacturing PMI, which includes the increasingly important services sector, jumped from April’s 41.9 to 47.8, with most of the increase coming from forward-looking new business.[viii] Note that these signs of stabilisation arrived despite some of China’s main economic hubs reportedly remaining under strict COVID restrictions, which we think points to some underappreciated resilience.[ix]

In our view, it also sets the baseline for what comes next for China’s economy, as those restrictions come to an end in Shanghai. Starting on Wednesday, people in areas of the city deemed “low-risk” based on COVID case tallies can leave their house for more than a few hours at a time.[x] They can return to work. They can use public transit. Those who have slept at work due to the severe restrictions on movement can finally return home.[xi] Indoor dining will remain banned, but shops will be able to operate at 75% capacity.[xii] Now, this isn’t a full return-to-normal, as frequent mandatory testing persists and we don’t see any indication that China’s federal government has abandoned its zero-COVID aims.[xiii] It is possible a resurgence in cases could bring some restrictions back. But for now, we think local government officials’ relaxing COVID policies should help enable an economic recovery.

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Our Perspective on Britain’s Oil and Gas ‘Windfall Profit’ Tax

Editors’ note: MarketMinder Europe is politically agnostic—we aren’t for or against any party, politician or policy. Our analysis seeks only to determine political actions’ potential economic and market impact.

Last Thursday, bowing to public pressure, Prime Minister Boris Johnson’s government seemingly reversed a late-March decision and announced it would impose a 25% windfall profit tax on oil and gas firms.[i] Whilst we don’t think windfall taxes are great, especially for the UK’s Energy sector, it is small in scope when viewed globally—and smaller than many commentators we follow initially anticipated, which likely limits its impact.

Chancellor of the Exchequer Rishi Sunak designed the energy levy to fund subsidies for households facing higher energy bills, with energy regulator Ofgem warning of another 40% hike to energy price caps in October.[ii] The popularity of such a measure seems understandable to us. Although we sympathise with households’ plight, we don’t think redirecting the Energy sector’s profits is necessarily the best way to alleviate energy price pressures.

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Surveys Still Say No to Global Recession

With each passing day, more and more headlines in financial publications we monitor warn of impending global recession (a decline in broad economic output). Yet we don’t think economic data we have reviewed support that argument. The latest business surveys imply ongoing growth—another overlooked positive amidst today’s dreary sentiment backdrop, in our view.

Though most major developed countries’ flash (preliminary) May purchasing managers’ indexes (PMIs) missed consensus expectations, they were also uniformly well above 50—suggesting a majority of respondents reported expansion. (Exhibit 1) PMIs are surveys tracking whether companies’ purchasing managers observed improvement or deterioration across a number of categories. On an individual nation basis, we observed many headlines focus on the UK’s weakest services PMI reading in 15 months, as survey respondents blamed economic and geopolitical uncertainty for the slowdown in client demand.[i] A development that received less attention based on our coverage: PMIs out of the eurozone and its two largest economies, Germany and France, continued showing growth despite myriad warnings that the Russia – Ukraine war would roil economic activity on the Continent.[ii]

Exhibit 1: The Latest PMIs

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Why We Don’t Think Valuations Should Worry You

With stocks enduring a sharp decline to start 2022, negative analyses abound as fearful headlines in publications we follow tout reasons things will only get worse.[i] One subject we have found cropping up amongst them: valuations—measures attempting to gauge the value of a stock based on comparisons of its price to metrics like the company’s sales or profits. Many commentators we follow claim that, even after this year’s share price declines, stocks are still too high. Some take a near-term view, suggesting today’s valuations aren’t at trough levels for a new bull market to start.[ii] Others suggest current valuations point to historically low long-term returns ahead.[iii] But we think you can set such worries aside: Our study of history and data show valuations predict neither short-term nor long-term returns.

Valuations, especially price-to-earnings (P/E) ratios, are amongst the most watched market metrics out there, in our experience. Hence, many commentators we read have noticed the big drop in America’s S&P 500 12-month forward P/E, to use one example. (Though forward earnings are only estimates, some analysts we follow often prefer using them in P/Es’ denominator because investors typically own stocks for future, not past, profits.) From 23 at the year’s start, it has fallen to 16 now, a roughly 30% discount.[iv] Cheaper! However, 16 is about average historically.[v] Similarly, trailing 12-month P/Es, which compare current prices to the past 12 months’ earnings, are also around average.[vi] Even broader, global indexes like the MSCI World show something similar.[vii]

To hear many bargain-hunting commentators we follow say it, average isn’t cheap—or at least, it isn’t cheap enough for the market slide’s bottom to be near. It especially isn’t cheap enough for Tech and the Tech-heavy US market, which led world markets until recently, they say.[viii] But as we showed last September, our research indicates P/Es don’t predict turning points in markets—or returns over the next year. Using a statistical measure called R2, which tells you how much P/Es can explain the next 12 months’ returns—ranging from 0 (not at all) to 1 (fully)—America’s S&P 500 has an R2 of 0.01.[ix] That means that, historically, whatever valuation US stocks are at—high, low or average—we think it is a coin flip what direction stocks will go from there. In our experience, expensive stocks can always become more expensive, and cheap stocks can always get cheaper.

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Last Week in Oils

Another week, another flurry of activity in oil markets. Or rather, oils—crude and, we suspect perhaps less top of mind for most folks, palm. The EU revealed details of its plan to wean itself off Russian fossil fuels, Russia continued to find buyers for its discounted crude, and Indonesia lifted its ban on palm oil exports. What does it all mean for investors? Let us explore!

The EU’s Plan Appears to Be a Little … Lacking

For weeks now, observers we follow globally have eagerly anticipated Brussels’ explanation for how and when it will wean the EU off Russian energy. The concerns are at the fore today given Europe’s energy needs water down sanctions, ensure Europe continues funding Russia and raise the risk that Russian retaliation leaves the EU (to some extent literally) in the dark.[i] But it has also been a long-running sore spot, especially with Russia occasionally throttling pipelines in order to exert political pressure and gain concessions from EU leaders.[ii] So a long-term pivot away from Russia has been talked of for years.

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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.