We might ultimately be vindicated; only time will tell. But one thing is certain: we were mistaken in predicting since the beginning of June that European markets would continue to rise. We can take some comfort in the Eurostoxx index’s performance in dollar terms, a positive 1.7 % between May 31 and August 17, with nearly identical trends in indices on both sides of the Atlantic. This is not much consolation, however, given that we had been anticipating an appreciation in the euro, and this is exactly what has happened. The euro now stands at USD 1.18.
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Weekly
It’s not all about the ECB, and the rise in long yields should soon be over
It is now almost certain: judging by the minutes of the ECB’s most recent monetary policy committee meeting, Mario Draghi’s comments during the Sintra forum on 27 June were no accident, but carefully devised to counter the embarrassing flattening of the yield curve in the previous few weeks. That subject is where the 8 June minutes begin, suggesting that there was an intense debate about what most members of the monetary policy committee regard as an anomaly. At a time of rising confidence in the economic outlook, the ECB was clearly expecting the yield curve to steepen, particularly after the French elections removed the main political risks.
Wage rigidity to low unemployment: an aberration? Not really.
Central bankers and economists seem baffled by the fact that wages are failing to accelerate in economies where low unemployment is pointing to full employment, which traditionally means rising pressure on wages. In response, central banks are on the alert, fearing that this apparent anomaly will correct itself any time, possibly resulting in a sudden acceleration in pay for which they might be unprepared. In Germany, the unemployment rate is at a post-reunification low of 5.7% and the Bundesbank has been watching this risk closely for almost two years.
The global auto cycle has had its day. The sector is not immune from a call into question in Europe
Since the beginning of the year, the European auto sector has been one of the weakest performers on the stock market. While economic growth prospects tend to be revised upwards in a context of lower deflationary pressures, we would have expected more encouraging signs from this sector. It seems that such a case is increasingly unlikely. Weighed down by weak domestic growth prospects after two years on the rebound, the sector finds itself dealing with the fallout of weak global prospects, the US administration’s ill-advised moves with respect to reflation, the decline in the price of oil and now, the rising euro… This is the view on a sector with characteristics that place it at the very heart of the challenges facing the financial markets in recent months.
Can Abe turn on the fountain of youth?
At 17,357 points today, Japan’s flagship index has nearly doubled since Mr. Shinzo Abé took power in late 2012. Among the developed countries, it is by far the best performer. Its performance has been twice as strong as that of the S&P 500 and three times that of the EUROSTOXX 50. The country’s paltry economic performance hardly justifies such a rise. Perhaps the BoJ’s pump priming is to be considered the lone explanation for the rocketing Japanese market, which would be analogous to recognizing that we are merely facing a giant speculative bubble. What factor would justify the Nikkei’s performance? Perhaps the belief that Abenomics has the magical power to combat the primary cause of the Japanese economy’s suffering: the ageing Japanese population?
The ECB’s QE1, five years later, what’s the point?
Will Mario Draghi, the President of the ECB, go through with a genuine quantitative easing program as he implied in his press conference on November 6th? It’s possible, especially if euro area inflation continues to fall, as we are predicting in the months to come, under the effect of falling oil prices, in particular. Besides the assurance of bigger and bigger liquidity injections to the financial sector, what impact would a potential QE plan have on the real economy?
How will history judge Jean-Claude Juncker?
The incoming President of the European Commission, Jean-Claude Juncker, will get to work on 1 November 2014 for a five-year term, i.e. until 31 October 2019, or even until 2024 if his mandate is renewed as the legislation permits. The responsibility that rests on his shoulders is immense and we can already say that his name will inscribed in the History books as either the President of an arthritic Europe on the verge of imploding or the one who, despite limited leeway, was able to set Europe on the course it needs to rekindle the collective ambitions Europe deserves.
Price of Oil, Global Inflation and T-Bonds
Disinflation continues to gain ground around the planet and things don’t seem poised to improve anytime soon. The effects of the drop in global oil and agricultural commodities in the coming months will compound the consequences of sluggish growth amid persistent competitive tension. Global inflation could fall to around 2.5 % to Q1 2015 while a growing number of economies slip into negative inflation territory. Such an environment could very well lead to a new slump in global interest rates…