Etikett: France

Rates going up…maybe not so fast

Rates going up…maybe not so fast

When examining the fixed income market outlook within the Euro zone, inevitably the discussion turns to Italy, and what the potential ramifications of this ongoing budget saga will be. Of course, the direction of European Central Bank policy (ECB) is closely linked here, but if we were to turn our attention to the broader economic outlook, how would that discussion pivot? Based upon recent data, it appears as if the widely held view that interest rates are poised to move higher may have to be revisited.

That being said, it is not as if we don’t think that Euro zone rates will, at some point, move higher, but the timing and magnitude of any potential increase could ultimately impact investment decisions. As we saw in the US, the ‘runway’ for an elevated rate setting can be much longer than expected, and traditional factors such as growth, inflation and central bank policy, do not always move in tandem.

Figure 1: Euro zone Purchasing Managers Indices (PMI)

Source: Bloomberg, as of 23 November 2018. Data for Italy and Spain only goes up to 31 October 2018. Historical performance is not an indication of future performance and any investments may go down in value.

With respect to Euro zone economic numbers, one could be easily forgiven for concluding that, perhaps, the peak in activity occurred last year. It’s not as if we are expecting a recession, but based upon recent data, a steady slowing in growth appears to be a potentially likely scenario. To provide some perspective, Euro zone real GDP rose up to +2.4% in 2017, but current consensus forecasts are looking for a reduced pace of +2.0% for this year and +1.7% for 2019.

The latest growth readings within the Euro zone certainly stood out, and not necessarily for positive reasons. German GDP came in at -0.2% in Q3 2018. This was weaker than expected and followed on the heels of a +0.5% gain in Q2 2018. In addition, it represented the first decline since 2015, and while it did reflect some temporary factors such as reduced auto production due to emissions testing, according to the statistics office, it was also the result of a drop in both exports and consumption. While the car production aspect could be reversed in upcoming data, the trade and consumption components certainly bear watching. For the Euro zone as a whole, growth also slowed to +0.2%, or half the pace of the prior period, and the lowest reading in four years.

Another important economic indicator to keep your eye on are the PMI reports. For the Euro zone and countries such as Germany, France, Italy and Spain individually, the readings seemed to have hit their peaks in late 2018/early 2018 and have been on a steady descent ever since (see figure 1). For the entire Euro zone, the latest figure fell to its lowest level in almost four years, highlighting the potential for further economic slowing.

Conclusion

Needless to say, this scenario has raised the debate regarding potential ECB action. While these numbers will more than likely not prevent the beginning of balance sheet normalization (expected to be announced at the 13 December 2018 policy meeting), it could push the ECB into a ‘later rather than sooner’ timetable for the first rate hike. For the record, the implied probability for this first rate hike has now been pushed out past October 2019, as of this writing.

Source of data unless stated otherwise: Bloomberg, 14 November 2018.

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Europe is near to closing the gap with the US

Europe is near to closing the gap with the US

ETF Securities Equity Research: Europe is near to closing the gap with the US

Highlights

  • Europe’s recovery is moving towards expansion while the US is in the late stages of this cycle.
  • The impact of tighter monetary policy, higher wage growth coupled with the stronger US dollar will weigh on US corporate profitability.
  • Earnings growth projections in Europe are expected to bridge the gap with the US by Q4 2018.
  • Europe’s valuation discount to the US is rooted in key sectors.

The US equity market has been steadily outperforming its European peers since the global financial crisis. The current gap between the two markets have widened to its highest level since then. The US equity markets’ outperformance can be justified by the past accommodative monetary policy, strong earnings momentum and technological innovation. In sharp contrast, the Eurozone has had to contend with two recessions since the financial crisis. Nevertheless, despite political headwinds, Europe is certainly appearing to turn a corner with a more favourable economic backdrop starting to feed into corporate profitability.

Macro outlook supports Eurozone

The Eurozone is witnessing higher services and manufacturing activity in comparison to the US. Added to that Q4 2017 Eurozone GDP growth (2.7% y-o-y) has outpaced the US (2.4% y-o-y) for eight consecutive quarters (Source: Bloomberg). Eurozone GDP growth has been heavily reliant on strong external demand. However as France and the periphery re-emerge, the expansion cycle is being powered by domestic demand. Since the start of 2014, we have witnessed a steady reduction in the negative output gaps in Spain, Italy and the Rest of Europe (RoEA).

This amount of slack in the economy is useful in understanding the interplay between supply and demand and gauging the phase of the economic cycle. The Eurozone will require several years of above-trend growth in order to absorb the slack in the economy. For this reason, the build-up of inflation is likely to be gradual. In comparison, the US is far deeper into its recovery and inflation is likely to garner pace significantly.

Wage growth to impact US profit margins

Despite the rising inflation outlook in the US, wage growth (known to be a lagging economic indicator) has been anaemic for more than a decade. However, the wage increase in January 2018, the strongest y-o-y gain since 2009, marked a turn of events. With the unemployment rate below most estimates of its natural rate and wage growth expected to accelerate, the Federal Reserve (Fed) has enough ammunition to hike interest rates faster than anticipated. The European Central Bank (ECB) will continue to remain data dependent.

For now, the existing slack in the labour market will justify a slower path to normalising monetary policy. The likely consequence of such a view is that the Fed will tighten monetary policy much faster than the ECB. In turn, the impact of higher wage growth in the US is likely to erode profit margins, a trend that we are starting to see as US margins plateau while European margins continue to pace higher.

Furthermore, the deterioration of the US fiscal balance subsequent to the US tax reform and the substantial increase in spending should support the US dollar higher. This could materially affect profits of export-oriented sectors in the US.

Earnings gap could narrow by Q4 2018

The fourth quarter reporting season has been strong for both the US and Europe, evident from the blended earnings growth rate of 14% and 37% respectively (Source: Bloomberg).

Expansion of revenue growth has been a fundamental support for the US equity markets while companies exposed to high operating leverage have benefitted the most on European equity markets. The best performing European sectors in Q4 2017 were energy, basic materials, financials and consumer goods. While US markets saw the highest earnings growth across technology, basic materials and energy. Looking ahead, the positive trajectory of Eurozone Purchasing Manager’s Index (PMIs), even taking into consideration the recent pull back in February, indicate European profit margins are set to expand further.

Pace of earnings projections favour Europe

Looking ahead, the projections for 2018 Earnings Per Share (EPS) growth continue to rise for both economies. However, the pace is slowing in the US in sharp contrast to Europe where estimates are set to accelerate towards year-end. Energy and materials sector are contributing the most to the pace of revisions going forward.

Europe trading at a discount to US

Eurozone equities have been trading at a discount to US equities since 2011. Cyclically Adjusted Price to Earnings (CAPE) ratios at 22x earnings in Europe are currently trading at a 13 percent discount to the US at 25x, in spite of the recent sell off (Source: Bloomberg).

European companies have historically paid out a greater share of their earnings to shareholders in dividends than US companies. Higher dividend yields in Europe at 3.3% compared to US equities at 1.9% enhance the case for investing in European stocks (Source: Bloomberg).

In light of the above discussion, we expect Europe to bridge the gap with US equities over the course of the year supported by higher earnings projections, an improving macro backdrop and lower valuations. While political headwinds linger, evident from the success of the anti-establishment Five Star Movement in the recent Italian elections, we believe it is unlikely to derail Europe’s economic expansion.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 207 448 3330
E research@etfsecurities.com

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

French primaries, another hit to the polls

French primaries, another hit to the polls

For the first time in the history of the right wing party, the French are able to have their say and vote for the Republican candidate for the presidential election in May 2017. These open primary elections happen at a time when populism is rising across the developed world. After the UK and the US, the focus is now on Europe. French political parties acknowledged the threat from the far-right chaired by Marine Le Pen. The winner of the primaries will most likely face Le Pen next year and potentially become the next president of the French Republic. French primaries, another hit to the polls

Last Sunday, more than 4 million voters gathered at polling stations in France, or on their computers for French living abroad, to choose the one who will highly likely face Marine Le Pen at the French presidential election in May 2017. Following the EU referendum and US election, the centre-right party (renamed the Republicans) is taking the rise of populism very seriously with these primaries a strategic move to guarantee the soon elected candidate its legitimacy in the race.

The results of the first round held yesterday were another hit to pollsters. While polls have consistently pointed Juppé as best placed for being the next French president with Sarkozy as his main opponent, Fillon made a surprising comeback and won the first round with 44% of the vote. Juppé only managed to get 28% and Sarkozy bowed out. The second round scheduled this Sunday is now between Fillon and Juppé with a debate scheduled for this Thursday. The possibility for Juppé becoming president is however much slimmer.

Juppé is a conservative. Fillon is more liberal. Both however take a similar approach on security and immigration issues. The successful candidate needs to be charismatic and well-prepared to promote their perspective on these key issues ahead of next year’s presidential debate in order to prevent a Frexit. Beyond the battle of rising populism, voters this Sunday should keep in mind that now more than ever, France needs a strong president and government that will be able to bring the country back to its feet socially and economically. People who will vote this Sunday will in this way be voting for their next president.

(Click to enlarge)
Edith Southammakosane, Multi-Asset Strategist at ETF Securities

Edith is a director, multi-asset strategist at ETF Securities, specialised in investment strategies across commodity, equity, currency and fixed-income. Edith has 9 years of experience in the ETP industry, with exposure to different aspects of the business, from product management to research and investment strategy. Prior to joining ETF Securities, Edith started her career working for Lyxor Asset Management in Paris as Marketing assistant. Edith holds a Master in Management with a major in Risk and Asset Management from the EDHEC business school (France).

President Elect Trump– Geopolitical & Market Implications

President Elect Trump– Geopolitical & Market Implications

President Elect Donald Trump’s ability to resonate with the populist mood has proven successful – populism in the developed world is on a worrying rise. We have collated what we believe are the most important investment implications of Donald Trump winning the US election.

Politics

  • The uncertainty around Trump’s political agenda and the possible increase in protectionist measures could weigh on global trade and ultimately dampen the global economic outlook, favouring bonds over equities
  • It is likely there will be panic amongst Nato allies in the Baltic states as Putin may decide to use Donald Trump’s friendly relationship to position troops in the region
  • In Europe in 2017 there are elections in France, the Netherlands, Germany, Austria and potential for an election in Italy. In these regions many populist parties are either leading or rising rapidly at present leading to further market volatility in 2017

Currencies

  • Currency vigilantes are likely to act. A sharp fall in the USD will result as uncertainty over trade and foreign policy jumps
  • Rising FX volatility is another negative for the GBP. GBP moves inversely to volatility and will likely sell-off against major currencies. JPY and CHF will be the big gainers under a Trump Presidency
  • MXN will experience a sharp fall as anti-Mexican sentiment from Trump is likely to depress investor optimism about the future of NAFTA and the benefits that accrue to Mexico from free trade

Equities & Gold

  • Donald Trump has been critical of loose monetary policy and is likely to seek a new governor with a more hawkish outlook when Yellen’s tenure is complete. Investors are likely react negatively to this monetary policy uncertainty
  • Furthermore, US equities are trading at a 50% premium to their long-term cyclically adjusted valuations, making them more vulnerable to a sell-off. Consequently, some equities are likely to hit their limit down (5% fall) and therefore have trading suspended
  • A weak USD is likely to benefit the S&P100 as 50% of revenues are derived from abroad, although, in the shorter-term they are likely to decline too.
  • A Trump win is likely to drive gold prices higher as investors seek a haven asset in a similar manner to what we saw during Brexit. Gold miners will likely benefit as they have a 2.4x beta to the gold price
  • Donald Trump has pledged $550bn of infrastructure spend, having control of both the House and the Senate means he has a higher chance of getting these proposals approved. Industrial stocks that maintain civil infrastructure are likely to benefit from higher opportunities for government projects under Trump

James Butterfill, Head of Research & Investment Strategy at ETF Securities

James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.

James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.

Market overreacts to Iran sanction lift

Market overreacts to Iran sanction lift

ETF Securities Commodity Research – Market overreacts to Iran sanction lift

Sanctions placed on Iranian oil exports by the US and five other countries were lifted after the International Atomic Energy Agency found the country to be compliant with its nuclear agreement with the P5+1 (the permanent members of the United Nations Security Council–the United States, the United Kingdom, Russia, France, and China plus Germany), plus the European Union.

Iran expects to lift exports by 500,000 barrels immediately and plans to increase shipments by a further 500,000 barrels within months.

Despite Iran’s ambitions (which we admit could lead the country to ignore oil economics in pursuit of winning market share), the country’s dilapidated infrastructure is unlikely to support the export of more than 300,000 extra barrels of oil.

Iran does not have enough fields in operation. Bringing online fields that have been delayed since 2014 would at most allow for 400,000 additional barrels. Immediately injecting cash investments cannot bring that figure up without a very long delay (18 months at minimum and more likely 2-3 years to build new operational infrastructure)

Expanding Iranian production significantly will require the build-out of more infrastructure, which would require the assistance of international oil companies. In an era of low oil prices and global oil capex cuts, the appetite to get involved is likely to fall short of expectations.

Iran will encounter difficulty in marketing its oil. The sanction lift is limited, especially with regard to US corporate involvement. US companies, including banks, insurers, oil companies or any US national cannot be involved in the selling of Iranian oil or the procurement of infrastructure. Sales of Iranian oil cannot take place using

US dollars. While European companies have more flexibility, their close ties with the US pose challenges. Had oil prices been higher, Iran’s strategy would have been to offer deep discounts on price to sell to countries like India to compensate for the increased complexity of dealing with its oil. But with oil prices so low, there is little potential for discounting.

Any expansion on Iranian oil production as a result of the sanction lift will not be picked up in today’s OPEC Monthly Oil Market Report and the earliest point in which we will have any concrete data on production and export increases will be on the 10 February report. We believe that the market will be disappointed with the outcome.

Saudi Arabia’s strategy to increase market share by depressing oil prices is working, judging by the size of the announced energy capex cuts in high-cost producing countries. We believe that by OPEC’s 2nd June 2016 meeting, Saudi Arabia will soften its tone and prepare the market for lower production (although little agreement to cut OPEC production will take place at that meeting).

Demand has meanwhile been recovering strongly in an era of low prices. IEA expects oil demand to rise to 96.71 mb/d by Q4 2016 from 95.28mb/d in Q4 2015. As global capex cuts start to bite, non-OPEC oil production is likely to fall. Factoring in a generous 1mn barrel increase in Iranian exports, would still mean that the market is likely to be in a small deficit by the end of the year.

As the oil market moves back toward balance, prices will likely recover. But we believe that the disappointment around Iran’s ability to ramp up exports will hit the market earlier and reverse the sharp decline we have seen in recent days.

Download the complete report (.pdf)

For more information contact

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular,

ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.