By Deutsche, do click to enlarge:
© The Financial Times Ltd 2016 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
European stocks as measured by the Stoxx 600 index finally passed their March 2000 high this week. As measured by the FTSE Eurofirst 300 they are set to pass their 2007 closing high if they can hold on to today’s gains.
Great news for investors in Europe, right? Well, sort of.
First off, record highs for shares are only good news if you are selling: investors should care about the future, and the higher the price, the lower the future returns, so record high prices are not obviously good news for buyers.
In its implementation of the PSPP, the Eurosystem intends to conduct purchases in a gradual and broad-based manner, aiming to achieve market neutrality in order to avoid interfering with the market price formation mechanism…
– ‘Implementation aspects of the public sector purchase programme’, European Central Bank
What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.
So, at least, says George Saravelos at Deutsche Bank.
His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets. Read more
There’s an abundance of dollars in the Eurosystem with nowhere useful to go.
We think, as we argued earlier, this is down, at least in part, to the Fed busting apart the money-market arbitrage for non-FDIC insured foreign entities.
In any case, note the following chart (via the Bank of England) of the euro/dollar cross-currency swap, which shows how much cheaper dollars in Europe got since reverse repos kicked into action in September 2013 (the nearer zero the cheaper dollars are):
Whilst everyone was focused on the ECB on Thursday…
… the Fed pulled this little snippet out of its bag:
As part of the continuing program of operational testing of its policy tools, the Federal Reserve plans to conduct a series of eight consecutive seven-day term deposit operations through its Term Deposit Facility (TDF) beginning in October.
Okay, the Fed has tested term deposits before, so it’s not that mind blowing an announcement in and of itself. The significance, if any, is that it’s subtle confirmation that both reverse repos and TDs will be used in the Fed’s unwind process. The maximum award has also been increased to $20bn. Read more
Whilst we ponder over what Draghi might or might not do at tomorrow’s ECB meeting, here’s an interesting point from Ramin Nakisa and Stephane Deo at UBS that’s worth bearing in mind during the press conference:
The chart below shows how the risk premium has evolved over the recent past: it shows how many basis points of spread are demanded by investors in exchange for a one notch downgrade. While Europe Area spreads were extremely cheap during the crisis, they are now too expensive.
Given the repeated hints from across the pond that BNP Paribas is going to get clobbered with a $10bn fine by the US authorities for alleged sanction busting, etc, we should not be too surprised that the European banks team at Credit Suisse has almost doubled its estimate of continent-wide litigation costs. The CS base case has been hiked from the $58bn guessed at in February last year to $104bn now.
To put that number in context, $104bn is roughly half the losses registered during the subprime crisis. And CS reckons some $39bn has yet to be provided for, so litigation risk is inevitably going to be a drag on growth and capital return for the foreseeable…
We’ll share the CS charts below, but first a quick glance at the main areas of potential pain: Read more
Some nice charts courtesy of Credit Suisse on Friday comparing European inflationary trends with those of Japan in the 1990s:
Two tables below the break, courtesy of Credit Suisse, detailing the ECB board’s easing predilections. Tabled story short, the increasing north/south divide that has accompanied the euro area’s drawn out crisis has lead to the balance of power shifting to the periphery. Or: doves in the ascendant. Interesting too that the Bundesbank might thus be pushing for ECB minutes to be released in order to quell those national interests.
Out of the 23 Governing Council members including 6 Executive Board members 13 are dovish or very dovish as we show in the table below, where we have assessed Governing Council members and their recent statements. The dovish cause of the periphery is further helped by the fact that three core representatives, both French nationals and the governor of the central bank of Belgium, have also been typically perceived to be in the more dovish camp. Increasingly the Bundesbank is thus becoming more marginalized which might explain the Bundesbank having consistently increased the volume of its verbal interventions throughout the crisis.
Here’s an essay published by the Bruegel think tank, penned by Ashoka Mody, currently a visiting professor at Princeton. He argues that if Europe wants to move forward in terms of integration, it first needs to stop. Click to read.
A hopeful outlook on the European economy has apparently become a non-contrarian view. This was bound to feel strange and does, but last week we highlighted the proliferating number of research notes citing reasons for relative optimism.
About that banking union and the aspiration to “break the feedback loop between banks and sovereigns”…
From JP Morgan’s Alex White:
It has been clear for some time that this is not fully achievable in the near term, because of the extent of the institutional journey required (likely including the prospect of Treaty change). For the foreseeable future, Europe’s banks will be left with what Minister Schauble has explicitly referred to as a “timber-framed” Banking Union. This will emphasize that the heavy lifting has to be done at the national level, and will be based around the development of national resolution regimes.
Some charts from Pew’s latest survey of 8,000 people across eight EU countries, most of whom are increasingly *insert euphemism* with Europe:
Young Europeans in countries hit hardest by the Continent’s economic crisis are finding it difficult to move out of their parents’ home. Data shows that over 50 percent of those aged 25 to 34 in some countries have yet to move out.
You know what doesn’t often conjure images of economic happiness? The 1970s, that’s what. And the argument coming from some quarters right now is that Europe, or at least its periphery, is heading back into such a period of stagnation and chronic inflation with unemployment leading the way. Read more
We have a banking union, kinda, sorta. After another marathon summit that stretched into the early hours of Thursday morning — with four hours apparently devoted to overcoming the differences between Paris and Berlin — a classic euro-fudge left everyone feeling relatively satisfied. From the FT:
While the compromise could permit all sides to declare political victory, it remains unclear whether the details effectively establish a two-tier regime or give the ECB ultimate responsibility for all banks.
Shocking. Read more
So, we’re going to the wire once again in the now traditional dance between Greece and the troika. As the FT reported on Thursday:
Eurozone leaders face a new round of brinkmanship over Greece’s €174bn bailout after international lenders failed to bridge differences on how to reduce Athens’ burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.
More euro gloom.
From S&P ‘s Global Fixed Income research team on Tuesday, “Europe’s Sovereign Crisis Continues To Erode Credit Quality.” Read more
It seems odd — and it may well be short-lived — but the US is beginning to shape up as a rare bright spot in the world economy.* Or indeed almost the only bright spot in the world’s economy, except for the Gulf petro-states. That is, if you were to base such an assessment solely on Japan’s September export data, released on Monday.
Nearly half of Asia’s larger companies are planning to make a significant acquisition in Europe over the next year, drawn by the availability of cheap assets amid the eurozone crisis, according to a survey by FTI Consulting, the FT reports. Some 45 per cent of Asian businesses quizzed in a poll of 800 companies around the world, all with at least 250 employees, said they were now looking to make strategic acquisitions in the region, as the eurozone’s problems have taken their toll on the valuation of businesses, particularly in the financial services sector. Lord Malloch-Brown, chairman of the European arm of FTI, said there was still unlikely to be a “rush to buy distressed Europe”, with continued nervousness among potential investors over the eurozone’s problems and timing and manner of any resolution of them. Reflecting those jitters, nearly a third of respondents in the FTI poll thought the euro would not survive 2012 intact.
Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a “fiscal compact”. But once the implications of a separate treaty are understood, I fear disillusionment will set in. – Wolfgang Münchau.
And sure enough, that’s precisely what’s happening. Analysts, strategists, and commentators across Europe are asking: ‘Where is the fiscal union?’ Read more
Angela Merkel has called for European Union treaty change to introduce as quickly as possible a legally-binding set of rules for the eurozone’s fiscal union, the FT reports. Looking very sombre in a black suit and not deviating from her written text, the German Chancellor said in a speech to the Bundestag, the German parliament, the eurozone was not facing a debt crisis, but a crisis of confidence that would take years to resolve. Ms Merkel confirmed that she and Nicolas Sarkozy, the French president, would present a reform plan together in Paris on Monday which would be aimed at creating a “stability union” of the 17 eurozone countries, with stricter budget discipline rules, and tougher sanctions, with stricter surveillance of national budgets. Ms Merkel stressed it was vital to have those rules made legally binding and as automatic as possible. “We are not just talking about a stability union,” she said. “We are beginning to create one.” Ms Merkel’s call for greater fiscal union echoed a speech by Mr Sakozy on Thursday night. He said that eurozone countries must be subject to tougher central control over their budgets to stem the sovereign debt crisis.
This week’s market upheaval in Europe has made it difficult to increase the firepower of the eurozone’s €440bn rescue fund to the €1,000bn that the bloc’s leaders had hoped for, the fund’s chief executive said on Thursday, reports the FT. Investors have fled from bonds issued by highly indebted countries. Luring them back by offering insurance on losses – the centrepiece of a plan agreed in Brussels on October 26 – would now probably use up more of the fund’s resources, Klaus Regling, head of the European financial stability facility, said. His concerns underline Europe’s difficulties in putting in place mechanisms to contain the sovereign debt crisis and, if necessary, help Italy cope with soaring refinancing costs. “The political turmoil that we saw in the last 10 days probably reduces the potential for leverage,” Mr Regling told reporters. “It was always ambitious to have that number, but I’m not ruling it out.”
Unfortunately, Nomura’s analysis of the EFSF’s shortcoming is both more convincing and more extensive. Here are some choice extracts, with our emphasis: Read more
The revamped EFSF risks becoming the wiggle side chair of financial engineering, lauded for its creativity but rarely used for its intended purpose.
On Monday, Nomura strategists released a useful note explaining the two new aspects of the EFSF — the special purpose investment vehicle (SPIV) and the credit insurance option — along with their pros and cons. The cons list is longer and, in aggregate, suggests that in spite of its aesthetic values, the revamped EFSF is riddled with too many contradictions to do much to help Italy and/or Spain. Read more