A parting of ways for the US and Europe?

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as much when at the end of June its President Mario Draghi said the European economy is on the cusp of transitioning from deflation toward reflation.

Meanwhile, other lead indicators in Europe, including GDP growth and earnings revisions, continue to improve driven by cyclical sectors. Despite the recent pullback in oil and commodity prices, cyclical sectors like consumer discretionary and materials have seen strong year-over-year earnings trends as underlying commodity prices remain higher than 12-18 months ago.

Mark Bogar – The Boston Company, a BNY Mellon company

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as … read more

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European elections: where moderation wins?

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June.

We think the French presidential election should be seen against a broader move away from populism across Europe. We witnessed this in the Austrian elections in December 2016 and in Bulgaria in February this year. The same thing was apparent in the Dutch elections in March and in the Finnish municipal elections in April. All of these elections had the potential to bring populist politicians into power but instead resulted in more orthodox centre-ground candidates winning the vote – often, as in the Netherlands, with a large, and largely unexpected, majority. The same trend is now apparent in Germany where Chancellor Angela Merkel gained ground in the German state elections, which boosts the prospects for her Christian Democratic Union (CDU) party in the all-important Federal election in September.

Suzanne Hutchins – Newton, a BNY Mellon company

With over 66% of the vote, Emmanuel Macron’s recent election win in France was a decisive result. Clearly it was a case of the electorate wanting the country to avoid the extremism we’ve seen with Marine Le Pen. The next step is for Macron to name a prime minister ahead of the legislative elections in June. We think the French … read more

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A countdown to the referendum

On 23 June, voters in the United Kingdom will consider a referendum on whether or not the nation stays a member of the European Union.  Opinion polls currently report that decided voters are about evenly split between remaining and leaving, and the undecided share is still in the low double-digits.  Our baseline is predicated on the assumption that the “remain” campaign wins, but we assign only a six-in-ten probability to that outcome.

Our inclination is to trim our 2016 forecast of real GDP growth from 2% to 1% in the event of exit.  This mostly owes to the drag of increased uncertainty on consumption and investment.  The UK avoids recession, we think, because domestic demand, especially from households, provides a floor for growth.  The British pound is the asset most exposed to a vote to leave the EU, but the response is not clear.  The Bank of England will no doubt closely monitor the situation, but there is no reason to expect a knee-jerk reaction.  On balance, the Bank is likely to leave the door open to an easier stance of monetary policy through dovish communication.

Aside from some general market strains and potentially large changes in bilateral exchange rates, the direct global economic consequences of a Brexit are likely to be limited.  The UK’s share in world GDP stood under 4% last year, and its bilateral trading relationships are mostly regionally diversified and limited in scope.  Finance bulks especially large in its economy, and adjustments within banking organizations to the changed trading regime would be still another drag on an already troubled industry.

Vincent Reinhart – Standish, a BNY Mellon company

On 23 June, voters in the United Kingdom will consider a referendum on whether or not the nation stays a member of the European Union.  Opinion polls currently report that decided voters are about evenly split between remaining and leaving, and the undecided share is still in the low double-digits.  Our baseline is predicated on the assumption that the “remain” … read more

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The real cost of the Greek crisis

Recent headlines, which pointed to Greece being the first ‘developed world’ economy to default on a payment to the International Monetary Fund, illustrate why the country’s plight matters. The concern is that it might indicate where other first world economies with large welfare states, huge debts and a dependency on imports might be going: headlong towards a process of deleveraging that becomes contagious. In Europe, this is the case even for signatories of the Stability and Growth Pact, the legal framework established in 1997 as a prelude to introduction of the single currency to ensure fiscal responsibility in the European Union [1] . For this reason, markets, which seem almost dangerously complacent, may well be right to expect a last-minute fudge on Greece. The risks of a financial accident are rising, however, as the stalemate continues.

Greece’s debt has been unsupportable but it may not be the only economy in such shape. At current growth rates, the debt loads of most western economies (broadly the highest ever seen in peace time) are similarly unsustainable, just less extreme.

Iain Stewart – Newton, a BNY Mellon company

[1] The pact was intended to limit public debt to 60% of GDP and government deficits to 3% of GDP.

Recent headlines, which pointed to Greece being the first ‘developed world’ economy to default on a payment to the International Monetary Fund, illustrate why the country’s plight matters. The concern is that it might indicate where other first world economies with large welfare states, huge debts and a dependency on imports might be going: headlong towards a process of deleveraging … read more

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Could the UK meet its EU Waterloo?

The European Union is by far and away the UK’s dominant trading partner. In 2014 the EU accounted for 44.6% of UK exports of goods and services and 53.2% of UK imports of goods and services.[1] EU member states account for four of the top-five export destinations of the UK and three of the top five import origins.

These figures sound impressive but we have never seen a good argument either way with definitive data that would give a clear indication of the economic pros and cons of the UK leaving the EU. Our hope is the upcoming referendum will concentrate minds and allow that debate to take place.

Our belief is it will be shown that the UK is better off in the EU. That said, if the UK did exit the EU we don’t necessarily think that would be calamitous, as we are not economically over-reliant on Europe. Either way, we are not too worried about the upcoming referendum. Our position is to wait and see.

James Harries – Newton, A BNY Mellon company

[1] London School of Economics, Should the UK stay or go? The economic consequences of Britain leaving the EU, 24 May 2015

The European Union is by far and away the UK’s dominant trading partner. In 2014 the EU accounted for 44.6% of UK exports of goods and services and 53.2% of UK imports of goods and services.[1] EU member states account for four of the top-five export destinations of the UK and three of the top five import origins. These figures … read more

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Can European equities deliver on economic promise?

While a few months ago we perhaps looked overly bullish, recent data releases have suggested our above-consensus view on the European growth outlook is well-founded. Indeed, it looks like the European Central Bank (ECB) launched its Q2 quantitative easing (QE) programme just at the point when a cyclical recovery started taking shape in Europe (as shown in the above graph).

Economic data out of Germany have surprised to the upside: the IFO business confidence survey reached a 10-month high in April, and purchasing managers’ surveys also point to a more broad-based recovery across the region. Spain has been improving for some time and now Italy is also making progress. We expect to see further acceleration in growth over this year and next, as Europe will benefit from a number of positive tailwinds, among them improving consumer and business confidence and increased bank lending. While the ECB was widely expected to act, the scale and scope of the QE programme surprised markets and caused a sharp deterioration in the euro against the US dollar. This trend is set to persist as the ECB continues with its QE programme and the US embarks on a rate-hiking cycle. The lagged effect of a weaker currency, together with the lower oil price should further support a eurozone recovery.

Neil Walker – Insight, a BNY Mellon company 

While a few months ago we perhaps looked overly bullish, recent data releases have suggested our above-consensus view on the European growth outlook is well-founded. Indeed, it looks like the European Central Bank (ECB) launched its Q2 quantitative easing (QE) programme just at the point when a cyclical recovery started taking shape in Europe (as shown in the above graph). … read more

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Chinese FDI into Europe has doubled since 2013

Chinese foreign direct investment into Europe hit US$18bn in 2014, almost double 2013’s level. Over the past four years, the average spend in the region by Chinese investors has been US$12bn a year, suggesting a slowdown in Chinese growth has not dented that country’s appetite for international exposure.

Given the recent down-to-the-wire nature of negotiations between Greece and its eurozone creditors, it is not surprising that China has been cited as a possible financier-of-last-resort for Europe’s peripheries in the event of a euro breakup. In one such scenario, China could provide financial assistance in return for ownership in vital infrastructure such as ports and/or use Greece for geopolitical advantage. If that happens, Portugal and Spain might consider going down the same route, as the fear of being able to fund themselves dissipates.

As things stand, we believe by far the most likely outcome is for Greece to achieve an element of debt forgiveness without the need for a euro exit. Nonetheless, the potential China angle may serve to focus minds around the negotiating table in the coming weeks and months.

Nick Clay, Newton

Chinese foreign direct investment into Europe hit US$18bn in 2014, almost double 2013’s level. Over the past four years, the average spend in the region by Chinese investors has been US$12bn a year, suggesting a slowdown in Chinese growth has not dented that country’s appetite for international exposure. Given the recent down-to-the-wire nature of negotiations between Greece and its eurozone … read more

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Europe’s year of reckoning: will extremists triumph?

% of votes for non-mainstream parties in national polls

Following the victory of the populist left-wing Syriza party in Greece, the old order of European politics seems to be under threat. Across the continent new political parties of the left and right are on the rise. Even in countries that have seen a return to growth, falling unemployment and improving consumer confidence, support for non-traditional parties continues to accelerate. Peripheral countries are splintering from the rest of Europe as they are generally seeing more protest votes go toward broadly left-wing soft eurosceptic parties, while the electorate in other countries are largely catching protest votes for right-wing, harder eurosceptic parties.

So far, recent developments in Greece have largely only unsettled the domestic stock and bond markets. But with parliamentary elections in Denmark, Estonia, Finland, Poland, Portugal, Spain and the UK slated for 2015, it may pay investors to read political commentary as closely as the data on Bloomberg screens in the months ahead.

Gareth Colesmith, Insight Investment

Following the victory of the populist left-wing Syriza party in Greece, the old order of European politics seems to be under threat. Across the continent new political parties of the left and right are on the rise. Even in countries that have seen a return to growth, falling unemployment and improving consumer confidence, support for non-traditional parties continues to accelerate. Peripheral … read more

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Will investors continue to buy bonds at any price?

The notion of value is often discussed by fund managers but rarely followed. Despite low valuations investors will still buy assets, especially if they are being driven by new information. Take the yields on European government debt. The assumption peddled by euro officials and supported by declining inflation expectations (principally the oil price) is that you need to buy bonds at whatever level they are on offer. Value doesn’t come into it. This is also having an effect on the surrounding markets.

One market that hasn’t really joined in the move to extreme values has been the US. Strong growth and a hawkish Federal Reserve has kept yields relatively high. For the US to join the party the market needs the news that US rates will not be going up in 2015. This would put the nail in the coffin of one if the big consensus trades of 2014 – being short the front end of the US curve and there would be a big squeeze.

Paul Brain, Newton

 

 

The notion of value is often discussed by fund managers but rarely followed. Despite low valuations investors will still buy assets, especially if they are being driven by new information. Take the yields on European government debt. The assumption peddled by euro officials and supported by declining inflation expectations (principally the oil price) is that you need to buy bonds … read more

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Germany is no superman for eurozone plight

Right now, Germany is much better off than it was ten years ago. Unemployment is very low and earnings are rising, but there is little inflation. Public finances are in good shape. The trouble in my view is that expectations about what Germany can contribute to the global economy have become unrealistic. Germany used to be viewed as the sick man of Europe, then people began to call it the locomotive of Europe, so the perception went from unrealistically negative to unrealistically optimistic. I don’t see a political willingness to work against its national interest. There may be further infrastructure spending announced, but it won’t be a big programme.

Holger Fahrinkrug, Meriten Investment Management

Right now, Germany is much better off than it was ten years ago. Unemployment is very low and earnings are rising, but there is little inflation. Public finances are in good shape. The trouble in my view is that expectations about what Germany can contribute to the global economy have become unrealistic. Germany used to be viewed as the sick … read more

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