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E.g., 23-02-2019
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    Gavekal Research

    What Europe’s Political Ructions Mean

    European politics is again heating up. Yesterday saw the Spanish government fail to pass its budget in a move likely to spur fresh elections. Populists in Italy and yellow vests in France are keeping up their campaign of disruption. Given that few of these issues directly threaten the structures of the EU, the question for investors is: Does any of this matter?

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    Gavekal Research

    The UK's Limits To Growth

    For the British economy, it has been a case of “mustn’t grumble” since the 2016 Brexit referendum. However, the effect of a weak fourth quarter GDP report was to debunk any illusion that Brexit uncertainty has been weathered. Such a reckoning was inevitable with or without Brexit, as the UK has in effect hit limits to its growth.

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    Gavekal Research

    The Future Of Italian Yields

    Since it became clear Rome and Brussels were moving towards a compromise to end their budget stand-off, Italian assets have outperformed. The yield on 10-year BTPs has fallen, narrowing the spread over bunds. But investors should be wary of positioning for a continued contraction; in both the short and long term, Italy’s deficit and debt dynamics are unpromising.

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    Gavekal Research

    Searching For A European Catalyst

    With 2019 not yet a week old, the eurozone is already looking uncomfortably like the odd man out. With the world’s big three economies heading more deeply into a synchronous slowdown, policymakers in the US and China are showing their readiness to alter course. European policymakers have displayed no comparable flexibility.

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    Gavekal Research

    A New Engine Needed

    As the European Central Bank halts net new asset purchases and ends its balance sheet expansion, European equities are back at almost exactly the same level as in December 2014, on the eve of the ECB’s announcement of quantitative easing. Clearly, with extraordinary monetary stimulus no longer in the mix, European stocks will need a different driver if they are to make gains in 2019.

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    Gavekal Research

    Winter For Eurozone Credit Growth

    A depressing autumn is turning into a dismal winter in the eurozone, as November’s deteriorating PMIs follow weak third quarter growth—and even a quarter-on-quarter contraction in Germany. Much of the softness can be attributed to poor external demand, especially from China and the emerging markets, and to the ongoing disruption to car sales caused by the introduction of new emissions tests. Together these have hammered European manufacturing,...

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    Gavekal Research

    The Doom Loop Tightens

    The stand-off between Rome and Brussels over Italy’s 2019 budget claimed its first casualty on Monday. Italy’s major banks were forced to club together to support an emergency bond issue by Banca Carige, after the rise in Italian government bond yields triggered by the budget battle eroded the mid-sized lender’s capital base, pushing it to the brink of collapse.

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    Gavekal Research

    Germany, And Europe, After Merkel

    All political careers end in failure. Doubtless Angela Merkel is already feeling the sting. Even as the long-serving German chancellor stands up on Tuesday to address the European parliament in Strasbourg, political observers and investors are looking beyond Merkel’s term in office to the identity of her successor. That is likely to be decided on December 7, when Merkel’s Christian Democratic Union is set to elect a new party chairman, so...

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    Gavekal Research

    Another Weight On The Euro

    The bear flattening of the US yield curve while European short rates remain anchored in negative territory means that it no longer makes sense for euro-based investors to hedge the currency risk of US bond purchases. Their hedging costs have risen to a level that wipes out the yield they would get on a 10-year US treasury. For US dollar investors, the opposite is true.

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    Gavekal Research

    Softly, Softly, Mr. Draghi

    Last week was an ugly one for equity markets on both sides of the Atlantic. But there was a crucial difference. US stocks are down from an all-time high set as recently as last month, with the S&P500 closing on Friday above (just) its 200-day moving average. In contrast, eurozone equities have been trending continuously lower ever since the end of January.

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    Gavekal Research

    More Trouble Ahead For Italian Yields

    The market gave an unequivocal two thumbs down to Italy’s budget deficit forecast announced on Friday. In proposing a deficit target for each of the next three years of 2.4% of GDP, finance minister Giovanni Tria was perceived to have bowed to pressure from Italy’s populist coalition for spending increases and tax cuts, and to have relegated debt reduction to a back seat. In response, Italy’s 10-year government bond yield jumped 26bp to 3.14%,...

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    Gavekal Research

    When To Buy UK Stocks

    “Deal or no deal” is the question blurring all UK investment decisions. Britain’s exit from the European Union should be settled before the end of the year, but the run-in will be nerve-wracking. Since Prime Minister Theresa May released her halfway-house “Chequers” plan in early July, investors have fretted that the UK may crash out of the EU next March with no new trading relationship in place. My colleague Anatole has consistently downplayed...

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    Gavekal Research

    The Case Against Eurozone Stocks

    The eurozone may not face the kind of liquidity crunch roiling US dollar-based emerging economies, but its equity markets remain on a grinding downward trajectory. The MSCI EMU index is within 1.0% of this year’s low and a range of technical indicators make for ugly reading. I would advise global investors to generally avoid the single currency area, but for those who must be there I will slightly surprise myself by arguing that the eurozone’s...

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    Gavekal Research

    Europe’s Whimpering Economic Cycle

    As with most of the developed world, the eurozone has seen a breakdown of the Phillips Curve link between inflation and unemployment. The 2008 crisis and ensuing double-dip recession created a sclerotic environment where labor market dynamics had little impact on general prices. This is another way of saying that Europe’s economy has remained stuck a in low-growth funk. Last year that seemed to have finally changed, with cyclical forces driving...

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    Gavekal Research

    Last Place In The FX Beauty Contest

    In mid-August, the US dollar hit a 12-month high against developed country currencies, and a multi-year high against emerging market currencies. Two weeks on, the burning question for investors is whether those highs represent a turning point, whether the dollar strength that prevailed from mid-April to mid-August has now played out, and whether the US currency is about to resume the softening trend that predominated through 2017. As always,...

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    Gavekal Research

    More Than Collateral Damage

    Among the collateral casualties of Turkey’s lira crisis have been European bank shares. Over the last week, as the lira plunged, the SX7E index—the EuroSTOXX banking index—slumped -7% on fears about banks’ exposure to Turkish borrowers. But Turkey is not the only concern weighing on European bank stocks. The sell-off over the last week is just the latest in a series of downlegs that together have seen the SX7E fall -19.7% over the last six...

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    Gavekal Research

    What US Auto Tariffs Would Mean For Europe

    Last week’s public hearings in Washington heard a chorus of industry opposition to the US administration’s proposed import tariffs on cars and car parts. But in Europe at least, markets appear to be coming around to the view that the tariffs will go ahead regardless. After Friday’s fall, the auto and auto parts sub-index of the Stoxx 600 has slumped -15% since late May when the US Commerce Department announced its Section 232 investigation,...

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    Gavekal Research

    The Message From Eurozone Credit

    Should we worry that eurozone corporate bond spreads have doubled since late January? After all, bond yields are rising globally and as deflationary risks have ebbed the European Central Bank has signaled its intent to normalize monetary policy. Yet, looking back at the eurozone’s last cycle, policy was tightened without spreads blowing out. My concern is that the present squeezing of financial conditions is sending a darker message, and will...

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    Gavekal Research

    Slower Eurozone Growth Ahead

    Wednesday was another grim day for European bank stocks, which are now down almost -24% from their late January peak. Yesterday Louis looked at the reasons behind the slump in bank shares globally, and attempted to find a silver lining to the dark cloud of their underperformance (see The Message From Bank Stocks). When it comes to Europe, however, the fall in bank shares is just one more reason to feel pessimistic.

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    Gavekal Research

    Behind European Underperformance

    Amid Monday’s trade-war-inspired risk-off, it is significant that European equities underperformed. Sure, Europe had already closed when White House trade advisor Peter Navarro emerged to reassure investors that the US administration is not proposing blanket investment restrictions. Even so, European markets suffered disproportionately. That should be no surprise, considering that the current global trade uncertainties have arisen against a...

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