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.

Global Markets rise as American Star Strips Away Wider Gloom

Despite further Eurozone and Asian economic weakness, and sovereign debt issues seemingly increasing not retracting, positive jobs and economic data from the United States and Canada through the week buoyed stock markets around the globe.

Unemployment numbers from the Eurozone continue to reach record highs. September’s rate of 11.4% across the 17 member states masks wide variations, with the worst numbers still seen in Spain, where unemployment has now hit 25.1% with over 50% of under 25’s out of work. A poll of purchasing managers by Markit showed a further economic retraction in the third quarter: if proved correct with official figures then the Eurozone will officially declared in recession.

The ECB waits to activate its bond buying program, announced last month. With the objective of pushing bond yields down and decreasing borrowing costs for the indebted Euro nations, the ECB is waiting for requests for assistance. Main target, Spain, is stalling with its politicians baulking at the requirement to give up even more fiscal and economic control to European central government. Meanwhile, mass protests in the Catalan region – one of the more prosperous regions of Spain – are calling for independence from the rest of Spain. The yield on Spain’s 10 year bonds, which had fallen from above the dangerous 7% level to nearly 5.5% after the ECB’s bond buying announcement, have risen to around 5.9%.

Greece finds its problems deepening, as the so called troika –IMF, ECB, and European Commission – have rejected part of the country’s austerity plans. Greece is due yet another round of financial aid soon, and this action could put that in jeopardy.

Over in Asia, the Asian Development Bank lowered forecasts for growth across the region, including China and India. The downward revision is dramatic, from 6.9% to 6.1% for this year, and 7.3% to 6.7% next year. It sees Chinese growth this year of 7.7%, but falling next year to 5.6%.

As if to prove the Asian Development Bank correct, Chinese service sector numbers came in weaker than expected, though this helped to lower crude oil prices (China’s oil demand is 10% of world total).

The United States, however, is bucking the trend of global weakness. The world’s largest economy has this week seen manufacturing PMI numbers and New Order figures both rebounding to growth from August’s contracting indications. Consumer confidence has risen for six weeks in a row, with sales at store open more than 12-months increasing by 3.9%. Conversely and strangely, US Factory Orders fell by 5.2% in August: something of a conundrum.

The big news came at the end of the week, with massive revisions to previously-released US unemployment figures. August’s number of payroll increase had been reported at 96,000 but has now been revised upwards to 142,000, and July’s number of 141,000 has been upped to 181,000. September’s estimated number has come in at 162,000.

Over the week, the Dow Jones Industrial Index rose by 1.3% to close at 13610.15, and the S&P slipped by 1.4% to 1460.93. The Nasdaq 100 gained a little less, just 0.4% to 2811.94, as Apple and Facebook gave away gains on Friday. In the UK, the FTSE 100 Index rose by 2.2% to stand at 5871.02.

Trading View

Everywhere the economic numbers seem to be pointing to further contraction and slowdown, and rising unemployment, except in the United States.

In fact, the United States is showing remarkable resilience in the face of massive adversity elsewhere. The way markets have reacted indicates a bit of ‘laisez faire’ on the part of investors: a sense of ‘we’ve been here, seen it, done it’.

Though Spanish bond yields are again rising, the country is putting off the inevitable. This indecision by the Spanish may be more political than economic management. Can the country’s leaders really afford to cede so much to the centre, when its own regions are rising up to try to force a breakaway?

Call me a cynic, but this market seems to have gone into political phase. In the United States, economic numbers are improving rapidly and the unemployment rate has fallen from 8.3% to 7.8% as the Presidential election comes ever closer. Of course, we’ve seen revisions and revisions to numbers before: what odds on a downward lurch coming after the election? If a new President is in, it will be his fault. If Obama stays in, then what does he really care – he’ll have another four years.

In Europe, the masses are protesting against further austerity measures and centralised government, and countries like Spain and Greece are holding back the weight of pressure from its people and the European leaders to act in the manner each side wants. It’s a two way pull, which will snap at some time.

My view remains the same, there’s always calm before the storm.