E.g., 09-05-2021
E.g., 09-05-2021
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    Gavekal Research

    Fighting Europe’s Headwinds

    Last Thursday, Nick Andrews and I argued that Europe’s economic recovery is set to defy dire predictions. The fly in the ointment, we argued, was a weakening in Europe’s hitherto robust manufacturing sector. Such concerns deepened on Friday, as more evidence emerged of slowing industrial activity. So does this headwind need to be taken more seriously?

    0
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    Europe Surprising On the Upside

    Europe may not yet have the pandemic in the rear-view mirror but infection rates in most countries are falling, vaccinations are surprising on the upside and a full opening of most services this summer seems likely. Since expectations for the eurozone remain constrained, there is a good chance that its yield curves soon steepen and the single currency strengthens.

    0
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    The Eurozone’s Sub-Surface Slack

    At first glance, with the unemployment rate down from a peak of 8.7% last September, it looks as if the degree of slack in the eurozone’s labor market may be small by historical standards. However, a look at the level of employment (including employees and self-employed) shows that employment is down by 3.1mn compared with the pre-pandemic baseline.

    0
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    Living With The Next Covid Wave

    Global markets are looking ahead to a post-pandemic world, but Covid-19 is still very much with us. Globally, new infection rates have risen sharply since late February, reversing their earlier decline. In the last few weeks, the US has experienced an alarming uptick in infections. The European Union is struggling to contain its latest Covid wave, which in several major countries compares with November’s for severity. And across the developing...

    2
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    The Future’s Clear, The Future’s Green

    Europe’s Green parties used to be denigrated by their political opponents as “watermelons”: green environmentalists on the surface, red hard-leftists beneath. In Germany, this attempt to marginalize the Greens by associating them with the discredited revolutionary socialists of 50 years ago failed dismally. Having established their credibility in regional politics, notably in Germany’s third richest state of Baden-Württemberg, where they have...

    2
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    How Bad Is Europe’s Vaccine Problem?

    The Covid news from Europe only seems to lurch from bad to worse. The suspension by several European Union countries of distribution of AstraZeneca's Covid vaccine over possible side-effects threatens to disrupt the EU’s vaccination programs and damage public confidence in vaccines in general. So how bad are things likely to get?

    3
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    The Yield Curve Control That Dare Not Speak Its Name

    A year ago today, European Central Bank president Christine Lagarde said “we are not here to close spreads”. With a fair amount of water having flowed under the bridge since then, the spread between 10-year Italian BTP’s and bunds has fallen from 261bp to just 94bp. So when on the anniversary of that proclamation, she said the “ECB is not doing yield curve control”, one could be forgiven for demurring.

    1
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    No Exit

    “We are not here to close spreads,” proclaimed European Central Bank president Christine Lagarde last March. “This is not the function or the mission of the ECB.” After the market took her at her word, Lagarde hastily back-tracked, and the ECB duly spent the following months doing exactly what Lagarde had said it would not.

    3
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    Draghi’s Reform Plan And Asset Prices

    Newly installed as Italy’s prime minister at the head of a broad coalition, on Wednesday Mario Draghi outlined an ambitious agenda of structural reforms. Notably, the former European Central Bank chief wants to oversee a root-and-branch overhaul of Italy’s tax system, while investing in the education system and streamlining public administration. His first task will be to steer Italy through the pandemic. But beyond that, Draghi’s plans could...

    0
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    Where Europe Went Wrong

    Mass vaccination programs were always going to suffer teething troubles. But the rollout of Covid vaccination campaigns in European Union countries has been especially slow and troubled compared with the UK and US. This has left investors wondering about the reasons for the vaccine underperformance, whether it will persist and what the economic impact might be.

    7
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    Europe’s New Political Cycle

    After a six-month respite, European political risk is back on the radar screen. Last Wednesday, ministers from the Italia Viva of former prime minister Matteo Renzi walked out of Italy’s cabinet in a dispute over how EU Covid recovery funds should be spent, leaving the coalition government of prime minister Giuseppe Conte scrabbling to survive. On Friday, the cabinet of Dutch prime minister Mark Rutte resigned over a scandal involving the over-...

    0
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    Europe’s New Lockdowns

    On Tuesday, Germany followed the United Kingdom by imposing fresh restrictions on activity and movement that in effect amount to a new lockdown comparable—and in some areas even stricter—than the anti-coronavirus shutdown imposed over the second quarter of last year. With infection rates across Europe stubbornly high despite the controls already in place, and with fears mounting about the spread of new viral strains, the risk is high that other...

    0
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    The Return Of European Inflation

    After averaging 1.2% YoY in 2019, the eurozone’s “harmonized” inflation rate went negative and settled at an abysmal -0.3% YoY in the last three months. Other price indicators have underwhelmed, as shown by the eurozone’s Citigroup inflation surprise index wallowing below -20%. In the US, by contrast, the same measure jumped back into positive territory after August. So what gives?

    0
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    The ECB And Euro Strength

    In the last couple of days the euro has broken higher against the US dollar. The last time the euro hit US$1.20, European Central Bank officials led by president Christine Lagarde emerged to talk the currency down, worried that euro strength would import deflation and erode European competitiveness. The question now is whether the ECB will again come out to jawbone the euro lower.

    0
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    Limits To EU Solidarity

    This week, Hungary and Poland vetoed the European Union’s €750bn recovery fund in a fit of pique at a new mechanism that will stop money going to “bad boy” states deemed to impede the rule of law. With southern Europe waiting for EU cash to support its post-Covid recovery, the two eastern bloc countries hope to force a compromise that will stop outside interference in their domestic affairs. The issue tops the agenda of today’s EU leaders’...

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    After Consolidation, A Further Rerating

    Given the violence of Monday’s rotation-driven rally on soaring hopes of an early coronavirus vaccine rollout, it is small surprise that equity markets are now giving back some of those gains. Expectations are still high that developed economies will be able to begin vaccination programs as early as the first quarter of next year. But the intervening days have given investors a keener appreciation of the challenges involved. Meanwhile, the...

    0
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    Europe’s Bitter Winter

    Just a couple of weeks ago there were still reasons to be sanguine about the damage that rising coronavirus infections would inflict on Europe’s economy and financial markets. Today those reasons are looking a good deal thinner. Europe’s near term trajectory increasingly resembles a “W-shaped” recovery.

    0
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    No Fiscal Panacea

    It’s been a big week in Europe’s debt capital markets. The European Union sold €17bn of bonds for its SURE job support program and Italy issued €8bn of 30-year bonds yielding 1.76%. The strength of demand was an encouraging sign, given the outsize role that debt-funded government stimulus will have to play in driving the eurozone’s economic recovery from the Covid crisis.

    0
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    Europe Battens Down

    Having remained sanguine over recent weeks as coronavirus infection rates in Europe mounted, on Thursday investors sat up and paid attention. After the French government imposed a 9:00pm curfew on Paris and eight other cities, and after the German government tightened restrictions on Covid hotspots including Berlin and Frankfurt, the euro Stoxx index fell -2.2% during Thursday’s session. Clearly as infection rates have risen, and governments...

    0
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    Counting Europe’s Zombies

    Usually when an economy contracts, corporate bankruptcies go up. This time is different. In European countries, bankruptcies in the second quarter—the low point of the lockdown-induced economic collapse—were down by anywhere between -16% and -33% in year-on-year terms. By suspending normal bankruptcy regulations and offering generous liquidity assistance, European governments successfully prevented their lockdowns from causing a mass wave of job...

    0
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    A Dove With Ammunition

    Hawks want the European Central Bank to wind down its monetary stimulus once the immediate Covid crisis is over. On Wednesday, ECB president Christine Lagarde poured a large bucket of cold water over that idea. Speaking in Frankfurt about the central bank’s current strategy review, she made clear that the ECB regards deflation, not inflation, as the main monetary risk, and opened the door to a symmetric inflation target going forward. In the...

    1
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    Lockdown-Lite

    A series of controls have been announced by European countries in reaction to sharp increases in the numbers testing positive for the Sars-CoV-2 virus.This has raised fears of renewed lockdowns and economic havoc. But it appears European policymakers are opting for a lockdown-lite approach to public health restrictions in order to minimize the economic damage.

    4
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    Riding Europe’s Second Wave

    The latest Covid figures from Europe make sobering reading, with countries including France, Spain and others seeing pronounced second waves of new cases. Equity markets, however, have reserved judgment. Yes, the rebound that started in mid-March has been stalled for the last two months as infections have mounted. However, European markets have not sold off significantly, despite this month’s US volatility. And an examination of the opposing...

    2
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    Better Days For Europe’s Domestic Plays

    It is hardly surprising that euro strength is generally bad for European exporter stocks and good for domestically-focused firms; or that exporter-heavy markets, like Germany, tend to lag at such moments. We saw this in 2017, when the euro rose almost 12% against the dollar between April and August, spurring a -2.4% fall in the DAX and a 0.7% gain in the broad Eurostoxx. So how to explain this year’s topsy-turvy markets, where the sprightly DAX...

    0
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    Europe's Covid-19 Loan Drag

    In response to the Covid-19 crisis, central banks in Europe have shoveled money to banks in a bid to have them deliver liquidity to stressed companies. A worry is that this new debt binge will weigh down corporate balance sheets for years to come, and limit growth. These concerns are probably overdone.

    0
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    Europe Stares Down A Second Wave

    Europe beat back the Covid-19 outbreak in March and April with decisive responses and reaped the benefit by reopening its economy in the early summer. Now, however, the price of fun in the sun has come due, with a rising case count that has led Britain’s prime minister, Boris Johnson, to label it Europe’s “second wave”. In response to rising infections in Spain, the UK has reimposed quarantine rules on returning travelers from the country, while...

    0
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    The EU And The Bond Markets

    The European Union’s decision last week to issue an additional €750bn of debt in its own name has profound implications for the euro-denominated bond markets. Firstly, the decision will mark the emergence of the EU (or more specifically the European Commission) as a major—and relatively attractive—issuer, on a par with sizable European sovereigns. Secondly, EU supranational issuance will be a stabilizing force in the market, reducing the risk...

    0
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    Europe's Deal

    Most of the attention paid to the European Union’s recovery fund deal, secured in the early hours of Tuesday morning, focused on how much of the agreed €750bn would be distributed as grants and how much as loans. That’s understandable. Haggling over this balance was one of the main reasons the talks dragged on into their fifth day. But as far as investors are concerned, the relative size of grants and loans is among the least significant aspects...

    1
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    Germany's Moment

    Could this be Germany’s moment? The prospect of a disgruntled Italy walking away from the European Union spurred a German move towards new burden-sharing arrangements, but the conditions have been brewing within Germany for a few years as it became clear that its old export-led development model was cooked. Such existential fears are driving a newly creative approach to Europe at a time when the EU’s biggest economy may be set to benefit from...

    0
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    The Club Med’s Cruel Summer

    France, Italy and Spain suffered the deepest contractions in their economic activity in the first quarter and through April. Yet government programs have successfully supported both business cash flows and household incomes. Beyond the immediate bounce-back from lockdown, however, their economic trajectories are set to diverge.

    0
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    From A Tax To A Subsidy

    There will be some hard bargaining ahead when the European Union’s 27 heads of government meet by video conference Friday in an attempt to thrash out details of the bloc’s proposed €750bn recovery fund. German chancellor Angela Merkel is urging a quick deal. But with the “frugal four” countries led by Dutch premier Mark Rutte holding out for strict conditions, a final agreement could yet take several months, with the fund unlikely to start...

    3
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    Europe’s Big Guns

    If the worry was that European Central Bank activism was threatened by German judicial chastisement, Christine Lagarde yesterday showed no sign of being cowed. The Pandemic Emergency Purchase Program was topped up to an almost bazooka-qualifying €1.35trn from €750bn and extended a further six months to June 2021. The move added fuel to the rally in euro assets. Rightly so.

    0
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    It’s Looking Hamiltonian

    It wasn’t quite the dawn of a new epoch, but the European Commission’s plan to boost its seven-year budget with €750bn of borrowing certainly ranks as a moment for the European Union. The plan needs unanimous backing from all member states and is far from a done deal. Yet it is likely to pass and in so doing it will change the nature of financial risk in Europe.

    2
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    Phase Two Beckons

    Europeans have spent big to freeze their economies as if held in suspended animation since mid-March. On the whole, this plan is working quite well but EU member states must now agree to a post-pandemic plan for demand stimulus if they are to avoid an all-too-predictable double-dip downturn. They will get a shot next week, when the blueprint for a “recovery fund” is unveiled.

    1
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    ‘No Limits’ Now ‘No, Limits’

    Markets have largely taken in their stride Tuesday’s decision by the German Constitutional Court that the European Central Bank exceeded its mandate by launching quantitative easing in 2015. The euro's move against the US dollar and the 10bp uptick in Italian 10-year yields were modest by the standards of recent volatility. This may be overly complacent.

    0
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    Italy’s Debt Sustainability Question

    In the short term, Italy’s sovereign spreads are unlikely to be greatly troubled by the decision late Tuesday from Fitch to downgrade the country’s debt rating. In the longer term, however, in the absence of some form of eurozone fiscal union, Italy will remain caught in a vicious debt trap, which must call its continued membership of the single currency into question.

    2
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    Why Europe Can Survive The Storm

    Economic activity indexes in Europe have collapsed to never-before-seen levels, yet markets have rallied as investors have become persuaded that policy responses are enough to avoid a full blown euro crisis from unfolding. Europe for once appears to be more decisive in managing a crisis situation than the US and it is possible it may manage a swifter pick-up once the public health situation stabilizes.

    1
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    Europe In The Eye Of The Storm

    After the US slapped a 30-day travel ban on visitors from Continental Europe the world’s three biggest economic areas are now effectively cut off from most human contact. As China sees its infection rate level off, the growth dynamic of this pandemic has shifted to Europe. Economic effects will depend on government responses.

    0
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    Playing The ECB Strategic Review

    When a government agency announces a “strategic review”, the presumption is that some knotty issue is being kicked into the long grass. That was the vibe yesterday when Christine Lagarde kicked off the European Central Bank’s year-long navel gazing exercise. In this case, however, investors would do well not to check out entirely from ECB watching.

    0
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    Italy Gets Interesting Again

    After almost five months of calm, there is a quickening in Italian politics. Luigi Di Maio yesterday stepped down as head of the governing Five Star movement as it faces the prospect of a drubbing in a regional election this weekend. The man most likely to capitalize on his troubles is Matteo Salvini, whose Lega Party is the most popular in Italy, polling 30-35%. The result may be more volatility in Italian assets, but a return to crisis...

    0
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    Towards A Green Supply Shock

    The “European Green Deal” announced with much fanfare on Wednesday was long on ambitious targets, short on implementation details about how they will be achieved. The lack of detail leaves investors to ask how Brussels’ green deal will affect the continent’s growth prospects. Here it is possible to set out some pointers.

    0
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    The Long Slow Road To German Fiscal Expansion

    To read the media headlines, you would either think that Germany’s coalition government is on the brink of collapse, or that Europe’s largest economy is on the eve of a massive fiscal expansion. The headlines are exaggerated. Yes, at the weekend the coalition’s SPD partner did elect a duo of free-spending leftists as its new leaders. But the government is likely to survive intact for its remaining two years. And although political thought in...

    4
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    The Upside Of Downing Tools

    A year after the eruption of the gilet jaune protests forced Emmanuel Macron to scrap planned fuel tax increases, the French president is facing fresh opposition to his program of structural reforms.On December 5, a coalition of labor unions is promising to down tools in an “unlimited” strike against the government’s proposed overhaul of France’s state pension systems.

    0
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    Europe's Political Paralysis

    With the Spanish general election unlikely to produce a proper government, the country looks increasingly ungovernable. For an economy that weathered the financial crisis intact but has chronic productivity problems, this is a worry. However, the result of Europe’s fragmenting political landscape is long-term policy stasis rather than a near-term collapse of the single currency.

    0
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    Draghi's Potent Legacy

    Mario Draghi threw the cat among the pigeons at last month’s fiery policy meeting of the European Central Bank by cutting interest rates and cranking up asset purchases. Today’s general council meeting and sign-off by the outgoing president should be quieter, but the circumstances of the baton-handing show how much the ECB’s reaction function changed under Draghi. That legacy poses a big challenge for his successor, Christine Lagarde, but he...

    8
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    Europe's Brexit Booster

    Boris Johnson has secured a revised Brexit deal and the stage is set for a key Saturday vote in the House of Commons. On balance, there is a 70% chance of the vote passing as Labour leader Jeremy Corbyn seems unable to control his Brexit-supporting rebels, while Johnson looks to have persuaded his Brexiteer wing that it could be now or never.

    0
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    Black Zero Or Green New Deal?

    Investors and environmentalists alike got their hopes dashed on Friday. Their best-case scenario would have seen Berlin invoke a climatic emergency to override fiscal orthodoxy and roll out a stimulative program of green investment. In the event, the measures announced not only fell short of the green lobby’s expectations—they were budget-neutral.

    1
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    Draghi's Fiscal Gift

    As he pushed interest rates still further into negative territory and announced the resumption of quantitative easing on Thursday, outgoing European Central Bank chief Mario Draghi made clear that he was passing on the baton of policy stimulus—not so much to his successor, but rather to Europe’s finance ministries.

    4
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    Italian Politics And The Bond Market

    On Tuesday, members of Italy’s left wing populist 5-Star Movement lent their support to the formation of a new coalition government with the Democratic Party. The new government, to be led by Giuseppe Conte, technocrat prime minister in the previous coalition, still has to secure a confidence vote in Parliament. But that should go through in the next couple of weeks. If it does, right wing populist Matteo Salvini—Italy’s most prominent...

    0
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    The Most That ECB Easing Can Do

    Mario Draghi fired no new bazooka on Thursday. But the European Central Bank president did signal the deployment of a whole arsenal of monetary weaponry in September. Such a package will cement the transition of the ECB under Draghi into a more active and more actively political institution, with a much more counter-cyclical policy stance.

    2
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