Europe is treading a fine line between growth and inflationEuropean equities have ushered in 2023 with a strong rebound, up 7.72%1. Exchange-traded fund (ETF) flows into the European region have risen by US$13bn, in sharp contrast to the US that has seen US$9bn of outflows year-to-date (YTD)as of 27 February 2023.
The confluence of China re-opening its economy and prudent management of resources during the energy crisis, alongside better valuations, helped European equities flourish. Essentially, the worst impact from the energy crisis that was priced in for Europe did not end up materialising, thereby improving sentiment.
Resilient Q4 2022 earnings season but outlook remains cautious
Europe is seeing better earnings growth for Q4 2022, up 8.81%3. The deep value parts of the market – financials, energy, utilities, consumer staples, and healthcare – continue to contribute to positive earnings growth. At the same time, China’s reopening has benefitted cyclical sectors across consumer discretionary and communications which posted the strongest earnings growth up 49% and 38% respectively4.
At 8% of sales, Europe has the second-highest exposure to China after Asia-Pacific (ex-Japan). It therefore would make sense to position for a better China macro-outlook in the sectors with the highest revenue exposure to China – semiconductors, materials, consumer durables, energy, and automobiles. We also know Chinese consumers saved one-third of their income last year, depositing 17.8 trillion yuan ($2.6 trillion) into banks, and investors are pinning their hopes on those savings finding their way into Europe’s luxury goods market.
Another factor favouring European equities has been European buyback activity which has increased to a record level, with a net buyback spend reaching around 220bn thereby creating an additional yield of around 2%5. This has helped Europe’s total yield (that is, buyback + dividends) outpace that of the US for the first time in 30 years.
Headwinds persist from further tightening by European Central Bank (ECB)
Euro-area Purchasing Manager’s Indices (PMI) continued their rebound in February reaching a nine-month high of 51, helped by easing headwinds from the energy crisis and resilient consumer spending amidst fading inflation. Headline inflation in the Euro-area for January dipped to 8.6%, showing further evidence that price pressures are easing6. However, core inflation in the Euro-area rose to 5.6%5 from 5.2% in December, highlighting that underlying price pressures continue to remain sticky. The more resilient economic data of late is likely to keep the ECB on a more hawkish monetary path. As monetary policy works with approximately a 10 - 12 month lag, we are yet to see the full impact of the recent spate of tightening.
Euro-area M1 growth is down to 0.6%, marking the second weakest reading on record pointing to weaker growth ahead. Furthermore, the Q1 results of the ECB Bank Lending Survey showed Euro-area credit conditions tightening at the fastest pace since 2009. In the Euro-area, moves in M1 growth tends to lead economic momentum by six months. This suggests that tighter monetary policy is leading to reduced credit availability for the real economy.
Tailwinds from looser fiscal policy to aid the Euro-area recovery
Prior to the Ukraine war, the Euro-area was characterised by relatively tight fiscal policy. However, the shock of the energy crisis drove a shift in fiscal policy. Governments are loosening their fiscal purse strings again, offering significant support to both consumers and businesses amidst the recent energy shock. Government expenditure, as a share of GDP, surged to almost 60% as COVID-19 hit (from just over 45% prior to the virus) and it is now rising again higher than before the pandemic7. The Eurozone budget deficit is now widening and heading towards 4% of GDP. Eurozone government expenditure as a share of GDP in 2022, through Q3, was 3% higher than the average from 2017 to 2019, with revenues up less than 1%. The think tank, Bruegel, estimates that EU economies have set aside €680bn to date to protect consumers from the energy crisis, which comes in addition to the EU Recovery Funds (€750bn from 2021 to 2027) which are now flowing. This is close to 10% of GDP, which excludes the cost of COVID-19 support.
The European economy remains caught between tailwinds – loose fiscal policy, easing energy prices, strong labour market, the re-opening of the Chinese economy – and headwinds of a weakening credit cycle in response to tighter monetary policy. Amidst this macro backdrop we expect investors to be more selective as the existing tailwinds should help Europe endure a milder than expected recession.
Fiscal
GBPJPY: Autum statement volatility!!GBPJPY
Intraday - We look to Sell at 168.00 (stop at 169.40)
We are trading at overbought extremes. This is negative for short term sentiment and we look to set shorts at good risk/reward levels for a further correction lower. The hourly chart technicals suggests further upside before the downtrend returns. We therefore, prefer to fade into the rally with a tight stop in anticipation of a move back lower.
Our profit targets will be 164.00 and 161.10
Resistance: 168.70 / 172.14 / 174.20
Support: 164.00 / 161.10 / 158.70
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Buy Pull BacksWith the US infrastructure bill passed and GDP expansion via fiscal support, the broad market is still long.
VIX curve show no signs of backwardation, but the cautionary note is the Debt Ceiling and Budget issues coming up - these may provide buying or covered call writing opportunities.
Side note: no hyper inflation and relates going lower as Fed rate rises are still off the table! If we have a growing re-opening economy in the US will supply chain blockages being worked through, we may see further upside in the US economy and credit cycle growth assisting.
SP500: Sell Rallies - Pre-empt PullbackMy strategy for the SP500 index is as follows:
- Exit Long positions on rallies and hold a core long position for the long term ( "time in the market")
- Wait for a deep pullback to start adding back Longs (SP500 is growth function)
- Happy to scalp short term, but I like a to 'load the wagon" long if we had a decent 600-1000 point correction!
- Trade in smalls and build a position (limit grids - no 'binary' trading)
Fiscal stimulus is still strong. Downside issues is the ridiculous USA debt ceiling, which is meaningless in a fiat currency system, but which is exploited for political reasons.
Infrastructures deal is great for the market - but that seems subject to risks also. The ideal situation would be to have a 'deep' correction, and then have a decent infrastructure deal be agreed to and passed in the house.
NB. Infrastructure deal is passed and debt ceiling is avoided - ignore the above (but it is very unlikely that we will not have volatility and further downside runs in the market as we approach end of September and go into October).
SP500: Grind and FizzlesWhilst one of my trading systems (as displayed) doesn't yet display Exit-Long signals, I have been pre-empting some expected volatility which I perceive can arise due to what can be an lengthy infrastructure Bill process along with the Debt Ceiling fiasco. I detailed this in an earlier post.
Up to this point I have been happy to ignore exit signals based on perceptions of market risk and fiscal support - noting the SP500 index in this model, is assumed to represent a US GDP growth function along with an 'off-risk' overlay.
Where I have low market risk, clear fiscal support (infrastructure bill is committed to), Covid-19 strains (delta strain) understood and the ridiculous debt ceiling overcome, I will assess if it is appropriate to be Long or Longer the broad US market.
I expect the market to pull-back, and will assess being long on limits at lower prices.
#adam-cox
Uranium Cycle in its Early InningsUranium is in the early stages of building a bullish regime of volatility over a Tail duration. It currently already has that over a trend duration.
You need to be taking full advantage of dips in this environment. Buy the damn dip.
Is it time to join the EUR bulls?With the agreement of the fiscal deal for the Eurozone, things are starting to look more positive for the monetary union. The much unloved EUR could finally have some good days in the months ahead.
EUR has pierced through the bottom of the monthly Ichimoku cloud. Should it succeed to close above the cloud in the months ahead, things should start getting interesting for EUR bulls.
Fed push Gold North don't be left behindFollowing on from last week’s chart, (see link below), the precious metal ranged for most of the week between 1900 and 1960, breaking 1960 on Thursday moving along my right hand fork of my trend line, resting at 1965. With the Federal Reserve pushing for average inflation, bolstered by improved consumer spending I can see gold still breaking new highs as the USD is push weaker by various global issues. The great resistance 2011, will soon become support pushing the yellow metal further north, as seen on my pervious chart, I had a pull back to the 1700 area, this no long stands as Federal Reserve Chairman Jerome Powell unveiled the central bank’s updated monetary policy strategy “that will seek to achieve inflation that averages 2 percent over time” and extraordinary fiscal stimulus have buoyed precious metal prices and seemingly created the perfect environment for non-yielding assets to outperform., (ref: dailyfx).
I see an initial drop on opening to the 1935 area, before starting the climb, breaking 2011, then pushing further north
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