Michael Barton

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Saturday, November 3, 2012

A Tale of Two Continents

Through the turmoil and gloom of Superstorm Sandy, US economic data this week was largely a bright spot. The same cannot be said of news from Europe where better than expected economic reports of recent weeks have been dented by this week’s worsening unemployment numbers and crumbling business confidence.

Turning to Europe first and we see that unemployment has now reached yet another record. Across the Eurozone unemployment now stands at 10.6%, with a whopping 18.5 million out of work. Unemployment in Spain and Greece is above 25%. Austria has the Eurozone’s lowest unemployment rate at 4.4%.

Consumer and business confidence has fallen away dramatically, and now stand at 3 year lows. Even the ‘stronger’ economies of France, Germany, and Finland are following the downward confidence trend.

As if things aren’t bad enough in Greece already, its latest call for a further €31.5 billion in emergency funds from the Troika (EU, IMF, ECB) have been knocked back, with ministers requesting the country take further austerity measures. However, Greece will be given more time to reach targets on debt levels and ratio of debt to GDP.

In China, China’s PMI has risen above 50 for the first time since July, indicating expansion may be on the horizon. Meanwhile, the Bank of Japan has upped its monetary easing policies after industrial production fell through the floor.

In the United States, it is estimated that Superstorm Sandy will cost the US economy around 0.5% in the fourth quarter, with uninsured losses accounting for $30 billion and lost business another $20 billion. However, with infrastructure rebuilding and the clean-up required, the impact could be short lived.

On a more positive note, US non-farm payrolls increased by 171,000 in October, though the unemployment rate picked up slightly to 7.9%. Weekly initial jobless claims fell, as did the four week average (to 367,250). Home prices rose by 2% in August, the biggest gain since July 2010. Consumer confidence rose to its highest level since February 2008, and personal spending increased by 0.8% in September. Finally, US factory orders increased by 4.8% in September, the highest rise in 18 months.

On the corporate front, GM, ExxonMobil, Chevron, BP, and Shell all reported lower earnings, as corporate profits continue their downward trend at quite a pace. UBS announced 10,000 job cuts as part of its efforts to restructure its cost base.

After losing two days to Superstorm Sandy, the Dow Jones Industrial Index fell by 0.11% to close at 13,093.16, and the Nasdaq 100 by 0.36% to 2656.28. The S&P, however, managed to post a small gain of 0.16% to rest at 1414.20. In London, the FTSE 100 rose by 1% to close the week at 5868.50.

Trading View
The views of business and consumers in Europe seem to be finally coming into line with my own. Confidence is falling away, as so-called stronger economies such as Germany and France begin to see a less rosy future.
Europe’s leaders have given Greece more time to hit debt to GDP targets, and yet with more austerity measures being taken, which in turn will push its GDP further negative and tax returns fall again, I see this as a very long game. Interestingly, the Troika is taking a far harder line with Greece: is this the beginning of the end game for Greece’s membership of the Euro? I believe that during the last 24 months, Europe and the world’s banks have been positioning themselves to protect against such an event. Whilst I think that, politically, for the time being Europe will want to see Greece remain, I cannot help but believe it will be Germany’s elections next year that see Europe being remoulded as the German public begin to raise concerns about continuing funding of ‘weaker’ countries.

The better and continuing improvement in the US economy is a conundrum to me, and one that I am finding hard to work out. Unemployment is stubbornly high, corporate profits are tumbling, and trade with the rest of the world falling. And yet, economic reports point to a better situation than for years. Perhaps the enormous quantitative easing programs have finally begun to work, though I feel this will lead to a rate of systemic inflation that will be unsustainable after the election. Or, perhaps, and more likely, is that consumers and businesses are spending before the impending Fiscal Cliff next year. My worst fear is that the anomalous US economy is due to a combination of both factors.

Needless to say, I am a seller into any strength in equity markets at this time.