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.


Germany’s New ‘Traffic Light’ Coalition Delivers Political Gridlock

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

Whilst Germany waits to learn whether another lockdown will cancel Christmas, there is now one present under the tree: a new government, meeting incoming Chancellor Olaf Scholz’s goal of having an administration in place before St. Nick’s arrival. His Social Democratic Party (SPD) has completed coalition talks with the Greens and Free Democrats (FDP), and all three parties have blessed this so-called traffic light coalition (named for the parties’ colours of red, green and yellow, respectively). They will be sworn in Wednesday, sending retiring Chancellor Angela Merkel (proverbially) riding off into the sunset. Yet whilst the faces and parties in charge are changing, we think the new coalition’s economic agenda mostly extends the status quo. Political gridlock also appears to be getting an extension, as the ruling parties have very little ideological overlap. This has already watered down major initiatives, as the policies outlined in the coalition agreement are a shadow of the parties’ campaign pledges.[i] We think they could very well diminish further as lawmakers grind away at them in debate. In our view, for stock markets, it all adds up to not much happening, keeping uncertainty low—a political backdrop that, in our view, is beneficial for stocks and spans much of Continental Europe as 2021 closes.

The coalition’s leadership and policies shaped up as most analysts we follow expected. Christian Lindner, leader of the pro-business FDP, will take the post of finance minister. Green co-leader Annalena Baerbock will be foreign minister, whilst her counterpart, Robert Habeck, will be climate and economy minister. As for policy, COVID containment will probably dominate everything in the near term, with rising cases and a contentious potential vaccine mandate likely monopolising attention. Beyond that, at the Free Democrats’ behest, the coalition has pledged to leave the country’s constitutional deficit limit alone, which likely hampers any effort to materially increase public spending—potentially jeopardising plans to increase infrastructure and defense expenditures.[ii] The FDP secured a pledge to avoid tax hikes, further reducing fiscal wiggle room. It wouldn’t surprise us if arguments over spending deepened divisions within the coalition and gridlock. The FDP did cease opposing the SPD and Greens’ insistence on hiking the minimum wage to €12 per hour, but negotiations over how to implement that remain.[iii]

Read More

A Utility Regulation Own Goal?

Editors’ Note: MarketMinder Europe favours no politician nor any party, assessing political, regulatory and legislative developments solely for their potential market and economic impact.

The energy crisis continues hitting UK households and energy suppliers alike, with more than 20 of the latter having collapsed in the last three months.[i] That includes Bulb Energy, which the government has agreed to provide a £1.7 billion bailout in order to keep its 1.7 million customers’ lights on and homes heated.[ii] This saga earned the chief executive of energy market regulator Ofgem an invitation to a hearing in the House of Lords, where peers grilled him on the industry’s seeming inability to handle a shock. In the hearing, he signalled that Ofgem will overhaul its regulations to include stricter stress tests (in which regulators use models and hypothetical scenarios to assess a company’s ability to withstand a financial shock) and capital requirements—echoing global regulators’ response to the 2007 – 2009 global financial crisis. In our view, this solution ignores the problems’ real cause. Furthermore, whilst it might give customers more insight into suppliers’ finances, it likely won’t make UK Utilities companies more attractive holdings for stock investors.

Much of the analysis on UK energy suppliers’ woes focuses on how their costs have changed as wholesale energy prices have spiked this autumn (meaning, the price suppliers pay for natural gas and other sources of power). The largest, most established companies have overall managed to weather the storm thus far, as they tend to build winter inventories much earlier in the year. As a result, they didn’t need to buy as much when prices spiked, helping keep their costs in check. However, the newer, so-called challenger companies, which tend to have more limited financial resources, keep much smaller inventories. As The Guardian reports: “Many challenger companies buy energy from the wholesale markets just three to six months in advance, which left them exposed to record energy markets prices after a rapid surge earlier this year.”[iii]

Read More

What We Think Fear and Greed’s Tug of War Says About Sentiment Today

Editors’ Note: MarketMinder Europe does not make individual security recommendations. The below simply represent a broader theme we wish to highlight.

What to make of investor sentiment today? After some areas of market froth appeared to signal the return of investor ebullience according to some financial analysts we follow mere weeks ago, the COVID variant Omicron’s emergence seemingly wiped away much of that renewed enthusiasm. This flipping-and-flopping in sentiment may bewilder those following closely. But to us, sentiment’s recent seesawing highlights the importance of not overthinking near-term swings—moods can change quickly, and our research shows they don’t dictate where stocks head next. We think investors benefit from taking a step back and viewing longer-term trends.

Before Omicron entered financial headlines, some pockets of investor euphoria from early this year returned to the forefront of financial publications we follow. Interest in electric vehicle (EV) companies skyrocketed as investors hunted for the next Tesla, the biggest EV maker by market capitalisation (a measure of a firm’s size calculated by multiplying its share price by the number of shares outstanding).[i] We think that interest at least partially explains why EV startup Lucid’s market cap topped American automakers Ford’s and General Motors’ despite just starting vehicle production in September.[ii] In mid-November, another EV startup, Rivian, hit a market cap of around $153 billion (£115.6 billion)—exceeding German automaker Volkswagen—making it the largest US company with zero revenue.[iii] Enthusiasm for cryptocurrencies resurged, too. After a summertime slump, bitcoin rebounded in the fall, with prices nearing $70,000 in November.[iv] After that autumn climb, we observed some crypto analysts predicting bitcoin will reach $100,000 by yearend (for reference, its price is $56,447 as of 2 December).[v] That zeal appears to have spread to anything seemingly attached to cryptocurrencies, with venture capitalists globally pouring more money into crypto and blockchain start-ups this year.[vi] These developments had some investors starting to see froth—much like the pockets of excess that existed early this year in special-purpose acquisition companies (SPACs), which are holding companies created for the sole purpose of bringing privately held firms to market.

Read More

About the Eurozone’s ‘Record’ Inflation Surge

Record-high inflation. Biggest-ever jump. Those are two common phrases financial commentators we follow used to describe the eurozone’s November inflation rate, never mind the fact that the eurozone itself is scarcely more than 20 years old. Records come easy in young datasets, and this latest one doesn’t mean a repeat of the 1970s’ inflation spiral is at hand, in our view. Rather, we think a quick look at the limited data available in the preliminary release for the eurozone and member-states shows that—as in the US—prices are up on the collision of three temporary factors: supply shortages, calculation quirks called base effects and energy prices. That people think otherwise suggests to us that there is a lot of room for stocks to climb the proverbial wall of worry as inflation chatter gradually fades.

It is true that eurozone inflation, which hit 4.9% y/y, is relatively high and up sharply from October’s 4.1%.[i] But a lot of that comes from energy prices, which rose an astronomical 27.4% y/y and 2.9% m/m.[ii] Excluding energy, food, alcohol and tobacco (the eurozone’s measure of core inflation, which typically excludes volatile categories), prices rose 2.6% y/y and just 0.1% m/m.[iii] Non-energy industrial goods rose 0.4% m/m, bringing their year-over-year increase to 2.4% as supply shortages continued, but services prices continued easing with a -0.2% m/m drop—in our view, a sign that reopening from lockdowns has largely run its course as an inflation driver.[iv]

But price trends from last year continue adding skew—a mathematical phenomenon called the base effect. In the year-over-year inflation rate calculation, the denominator is prices a year ago. As Exhibit 1 shows, the eurozone was still in deflation a year ago, lowering that denominator and mathematically skewing the inflation rate higher. We think the impact is even clearer when you look at Germany and France. German inflation jumped to 6.0% y/y in November, the fastest since reunification of East and West Germany.[v] But French inflation barely inched higher, from 3.2% y/y in October to 3.4%.[vi] This wasn’t because France has stolen Germany’s traditional reputation for price stability, but because Germany experienced deflation in 2020’s second half after the government temporarily slashed its value-added tax (VAT) in the name of COVID relief. France, which didn’t cut VAT, didn’t have deflation last year. That means its year-over-year calculation base is higher than Germany’s, subjecting today’s inflation rate to less artificial upward skew.

Read More

A Call for Calm After a Rocky Friday and a New Variant’s Emergence

Stocks weren’t in the holiday spirit on Friday, falling sharply on fears of a new COVID variant, chiefly hailing from South Africa, that the World Health Organization dubbed Omicron. UK stocks fell -3.7% on the day, whilst America’s S&P 500 slumped -2.3% (in USD), notching its worst Black Friday session on record.[i] In response, the US, UK and EU imposed restrictions on travel from a group of southern African countries.[ii] It all adds to worries we have seen from financial commentators we follow over a virus uptick this winter, with many fearing the variant will interrupt economic activity and hit stocks hard. However, we think investors benefit from staying cool—and thinking like stocks. Yet another variant can be troubling on a human level—and try one’s willpower. However, from an investment perspective, we think the past two years have shown the real market risk isn’t the outbreaks themselves, but governments’ reactions to them. On that front, we see little sign much of anything changed on Friday.

Besides being first identified in South Africa, we know next to nothing about the scope of Omicron. Health experts cited in news publications we follow don’t yet know how infectious, contagious, severe or lethal this variant is. However, as legendary investor Benjamin Graham put it, in the short term, markets are voting machines—and the news of a new variant likely spooked investors on a day when US markets close early. In our experience, those shortened sessions can mean thin trading volumes in some markets, likely exacerbating fluctuations. However, we don’t think markets are likely to be flustered for long: They have seen this movie before.

Whilst it may be tough to fathom, we have been living with COVID—the original outbreak and subsequent variants—for almost two years now. To us, that recent history shows outbreaks themselves aren’t negative for stocks—the actual market risk arises from economic lockdowns. When governments worldwide suddenly implemented lockdowns in early 2020, stocks priced in the severe economic disruption, resulting in a record-fast bear market (a bear market is a typically long, fundamentally driven equity market decline exceeding -20%). But stocks also priced in lockdowns’ impact quickly—and moved on. Equities began rising in March 2020, long before lockdowns even lifted. They continued rising when caseloads rose that autumn. In our view, markets dealt with the clear downside of lockdowns on economic activity—and looked beyond them.

Read More

Don’t Overrate Black Friday—Even This Year

Well, today is Black Friday—the day after America’s Thanksgiving holiday, when retailers traditionally offered big discounts as the official holiday shopping season kicked off. Many UK retailers have imported it in recent years, leading many financial commentators we follow to import the American tradition of attempting to read Black Friday tea leaves for insights into the economy’s health. In our view, that seems doubly true this year, as people search for clues on how global supply chain bottlenecks will affect the availability of Christmas presents—and holiday sales in general. But ports backlog or no, we recommend not getting hung up on Black Friday. Whether or not this weekend’s final tally is big, we doubt it will offer any insight worth basing portfolio decisions on.

We can understand the temptation to read into Black Friday results this year. Financial commentators we follow often see Black Friday as a signal of economic health. This year, many couch them as bellwethers of the US and UK’s ability to withstand the supply chain snarl. But in our view, there are likely too many moving parts to be able to isolate this or other headline concerns, including the expiration of COVID assistance and potential job losses as vaccine mandates take effect. Plus, these issues aren’t exactly a surprise at this point, as many commentators we follow have been warning of these potential headwinds for months. So even if you could glean something negative from the results, it likely wouldn’t be earthshattering for stocks—it would probably just confirm whatever markets have already priced, as our research shows they reflect all widely known information, including forecasts and repeat warnings in financial headlines.

Even in a normal year, to the extent any year is normal, we wouldn’t overrate Black Friday. Yes, holiday sales are nominally important to retailers’ full-year profitability, but they are just one variable affecting two sectors of the stock market (e.g., Consumer Discretionary and Consumer Staples). Even then, we don’t think Black Friday is the be-all, end-all for holiday sales. Over the years, the traditional Black Friday discounts have spread beyond the day. First it was Black Friday weekend, then Black Friday week, then Black Friday month. This year, we started receiving holiday discount codes for several retailers in October. So we doubt that when the weekend’s sales totals hit the wires that it will be hugely telling about the month—or December, when an awful lot of holiday spending also occurs, according to our research.

Read More

Why the Emergency Oil Reserve Release Isn’t a Game Changer

After weeks of signalling it was preparing to do so, the US President Joe Biden’s administration announced today it will attempt to curb petrol prices by releasing 50 million barrels of oil from America’s Strategic Petroleum Reserve (SPR), part of a coordinated release with China, Japan, South Korea, India and the UK. The UK will contribute 1.5 million barrels from its emergency reserves, India has pledged 5 million, and the other three are finalising their plans.[i] And in response to this forthcoming supply increase, global oil prices rose.[ii] Yes, a move designed to rein in oil prices seemingly had the opposite of its intended effect, illustrating emergency reserves’ complicated relationship with oil prices. Whilst moves like these can have a short-term impact—predominantly through sentiment—we think they do little to change longer-term supply and demand fundamentals.

Oil prices are set globally, on world supply and demand fundamentals. The US’s 50 million barrel contribution to the global release represents less than 0.2% of global production, based on October’s output.[iii] The full global release will likely be around 65 to 70 million barrels, according to industry researchers’ calculations, which is nowhere near enough to move the needle over any meaningful stretch.[iv] This is partly because the Organization of the Petroleum Exporting Countries (OPEC) also has a great deal of influence on global supply and is reportedly planning a counter move next week.[v] Previously, OPEC and Russia were coordinating to increase output by 400,000 barrels per day.[vi] If the cartel decides to slow or pause production increases, it would likely neutralise the coordinated supply release. In our view, markets are likely weighing the totality of the global supply landscape.

Even if OPEC sits tight, the release of emergency reserves likely has little long-term impact. It might help curb oil and petrol prices by a bit in the near term, but it likely won’t alter the longer-term supply and demand landscape. That will probably depend on private producers boosting output, which is already starting. The US, which is one of the largest global producers, has added 67 oil rigs since the beginning of September, bringing total rig count to 461 as of last week.[vii] Last week’s American industrial production report showed oil and gas well drilling rising 9.3% m/m in October, bringing the cumulative increase since July 2020’s low to 93%.[viii] The International Energy Agency (IEA) reported global oil production rose by 1.4 million barrels per day (bpd) last month and pencilled in a further 1.5 million bpd increase over the rest of this year.[ix] That is just a forecast, but it seems sensible to us based on the rise in drilling activity. As global output rises, we think it is likely to help supply and demand come back into balance, which will likely help stabilise prices.

Read More

Markets Respond to Price Signals

We have noted before that when markets are allowed to work, we have found that high prices are often self-correcting because they invite greater production—raising supply—and limit demand, which stabilises or tugs prices back down. For example, after lumber prices hit record highs in May, American sawmills ripped more boards, whilst some buyers balked, sending prices down -72.8% through the summer.[i] Though up a bit lately, they remain -52.2% off their May peak.[ii] We see this same dynamic playing out in myriad other areas. Let us take a tour.

Shipping backlogs? The Baltic Dry Index—a measure of bulk goods’ (like coal and steel) transport costs—hit a 13-year high in October, but it has since tumbled -52.62% as global port congestion eases.[iii]

Exhibit 1: Transport Costs Climb Down

Source: FactSet, as of 23/11/2021. Baltic Dry Index, 1/1/2021 – 22/11/2021.

Read More

Inside the UK’s Big Inflation Jump

The Office for National Statistics released UK October inflation data today, revealing the Consumer Price Index (CPI) inflation rate jumped to 4.2% y/y from September’s 3.1%.[i] (CPI is a government-produced estimate of goods and services prices across the broad economy.) Many financial commentators we follow portrayed it as a worrisome development for the UK economy, warning the acceleration was a sign fast inflation is not “transitory,” which is the word policymakers use most often to describe fleeting price rises. Indeed, for households facing rising costs, high inflation is probably most unwelcome. But we also don’t see much to suggest that it will stick around indefinitely. In our view, the price increases driving October’s accelerating inflation are unlikely to repeat in perpetuity. Should that be the case, simple math suggests they will eventually fall out of the inflation rate. Let us discuss and show how this works.

When assessing short-term inflation drivers, we think it is best to examine the month-on-month price change in various categories, as it avoids the backward-looking skew that can accompany the year-on-year rate (by sheer virtue of having year-old data in the calculation). In October, CPI rose 1.1% m/m, with energy prices amongst the primary causes.[ii] Prices in the category of “Electricity, Gas & Other Fuels” rose 11.9% m/m.[iii] The measure of CPI less energy and unprocessed food rose only 0.6% m/m, little more than half the total month-on-month inflation rate, yet food prices rose only 0.5% m/m.[iv] In our view, this is a strong indication of fuel and electricity’s severe impact on the headline inflation rate.

Yet energy wasn’t the only culprit. Echoing a recent trend in America, prices of second-hand cars rose 4.6% m/m, bringing their total rise since April to 27.4%.[v] Most analysts we follow pin this on a shortage of new vehicles due to the global run on semiconductors, making it a case of the global supply chain crunch driving consumer prices higher—a conclusion we generally agree with. Also echoing America’s experience earlier this year, categories with ties to the easing of COVID restrictions—including air travel (5.5% m/m) and restaurants & hotels (1.1%)—contributed to the headline inflation rate.[vi] In America, we found that these categories accelerated when restrictions eased because the rapid recovery in demand exceeded supply—then the price increases slowed when consumer habits returned to normal and the hospitality sector increased staffing.[vii] It would not surprise us if travel and leisure-related prices in the UK charted a similar course.

Read More

Our Perspective as Russia Sabre-Rattles in Ukraine—Again

Buckle up. Satellite images show Russian troops are amassing along the border with Ukraine, and US intelligence agencies have reportedly warned European allies that an invasion is possible. NATO announced its solidarity with Ukraine Monday, raising the perceived risk of Western nations getting dragged into the conflict despite Ukraine not being a NATO member. We have already seen a few articles in financial publications we follow warning an invasion and conflict would bring terrible consequences for the global economy and stocks, and if tensions ratchet up, our experience suggests those warnings will probably get louder and more widespread. We encourage long-term investors to steel themselves against the associated fear now: In researching market history, we have found regional conflict is highly unlikely to cause a bear market (typically a deep, lasting decline of -20% or worse with an identifiable fundamental cause). So whilst fighting is tragic, and potentially a cause for near-term volatility, we think it is a mistake to overrate the threat to stocks.

Now, of course, we aren’t in the intelligence community and have no access to Russian President Vladimir Putin’s plans. This may be all a bluff. It may be yet another move designed to goad the EU into approving the Nord Stream 2 gas pipeline that bypasses Ukraine, although Germany decided Tuesday morning to delay approval anyway.[i] But in the event Russia does invade Ukraine, remember: Markets have sadly dealt with a number of regional conflicts and potential conflicts in recent years. The list is long. The first Gulf War and Bosnian War in the 1990s. US-led intervention in Afghanistan and Iraq and the Hezbollah/Israel dust-up in the 2000s. Libya and Syria in the 2010s. Russia and Ukraine in 2014 over the former’s annexation of Crimea and meddling in eastern Ukraine—and a host of others. In general, when reviewing historical MSCI World Index and S&P 500 returns, we found that if stocks registered the strife at all, they followed the same general trajectory: negativity as tensions escalated and armed conflict became an increasingly realistic possibility, then a recovery as the endgame became clear.[ii]

In cases where the endgame was armed conflict, we found that recovery typically arrived as or just after the fighting broke out.[iii] Not because regional war is bullish, but because the fighting ended the uncertainty over whether sabre-rattling would spiral into military action. It ceased the will-they-or-won’t-they and let investors weigh the conflict’s reach. In all these cases, even when major powers were involved, the conflict occurred on a very small swath of the global economy, with no impact on commerce in the developed world or major Emerging Markets. We think that clarity enabled markets to move on quickly. Exhibit 1 details one example: the Bosnian War, which was the most recent conflict on Continental European soil and therefore a particularly relevant comparison, in our view.

Read More

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.