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.