EU Economic Update – 13 October 2014

Markets fall as German economy lurches toward recession; European policy makers squabble

Developed market equities fell this week as fears over third quarter growth in the euro-zone mounted, leaving some investors sceptical of whether or not the world’s corporations can deliver growth when reporting earnings for the period. On this note, the starting pistol sounded this week Alcoa, the US listed miner, reported Q3 earnings.

While the economic data calendar was largely quiet in terms of major releases from the UK and the US, European data and a bearish downgrade to continental growth prospects by the IMF provided the impetus for global equities to plot a course for another week of losses.

The last seven day’s price action has seen losses in the UK, Europe and some parts of the US reaching into double figures. Since early September, losses for the DAX, CAC40 and IBEX have all exceeded 10%. In addition to this, the FTSE 100 and FTSE 250 are each approaching the 10% level.

Although core US indices are down a mere 4-5% over the same period, the smaller cap benchmarks have fared much worse with the likes of the Russell 2,000 also sitting on a 10% loss.

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The week’s data and drivers

In detail, the IMF reduced its forecast for German growth in 2014 from 1.9% down to 1.4%. This followed what was, according to data released this week, the economic powerhouse’s steepest drop in industrial production and factory orders since the aftermath of the financial crisis in 2009.

Factory orders plummeted 5.7% while industrial production contracted by 4% for during the month of August, prompting fears among investors that October’s Q3 growth figures may show Europe’s largest economy slipping into recession.  

In addition to the poorer data emerging from Germany, Mario Draghi and Wolfgang Schaeuble clashed at the annual IMF meeting in Washington over the direction of monetary policy in Europe. This was as the ECB president used his opportunity to address the delegation by calling upon continental governments to ease fiscal policy where budget constraints permit such moves, while the German finance minister reiterated his prescription of greater budgetary discipline.

The conflicting policy ideas brought to the fore previous concerns that despite the best of intentions, the ECB may find itself hamstrung by the German government when it comes to implementing the policy measures that many believe the continent desperately needs.

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FOMC minutes denote bearish sentiment among US policy makers; UK manufacturing production slumps

Elsewhere in the world, minutes of the most recent FOMC meeting were released this week. The highlights of the release was the dialogue between policy makers which appeared to highlight a growing sense of unease over weak domestic demand in Europe and the nascent strength of the US dollar.

Some investors and traders took the comments as an indirect indication of policy maker’s concern over the outlook for the US economy and a lingering sense of dovishness, prompting a short lived recovery of US indices.

All in all, the week’s events have done little to alter our baseline outlook for both core markets in the US & UK and for indices on the continent as well.

This is that we still expect positive numbers from the UK economy given the strong H1 performance and strong indications of an above average performance throughout Q3.

In relation to the US economy, we expect an “all things considered” positive performance on the back of the strong rebound from a weather driven contraction in Q1, to positive above average growth in Q2 (4.6%).

On the continent, despite the overhang of disinflation driven doom and gloom during much of the year, few forecasters had anticipated a higher level of growth than the current projection of 1%. While significant risks remain at both the core as well as on the periphery, we continue to expect divergent monetary policies, the potential for outright QE and the positive potential for greater earnings momentum to support equities on the continent over the medium term.  

In the interim, we will remain attuned to both economic, political and geopolitical risks while continuing to advocate a higher level of caution when assessing opportunity.

European Indices – DAX (Blue), CAC40 (Red), IBEX (Black)

EUINDICES12OCTOBER

 

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