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Silvia Quandt & Cie. AG, Merchant & Investment Banking: In-between the lines - Bernhard Eschweiler
Silvia Quandt & Cie. AG, Merchant & Investment Banking / Schlagwort(e): Finanzen/
- Market volatility more likely temporary correction than new downtrend
- Global macro picture continues to brighten and broaden
- Euro area better positioned to contain renewed tensions than last year
The first-quarter equity rally broke between the second half of March and last week. The DAX, for example, lost 8% between the peak on March 16th and the end of last week. A notable exception was the Chinese market. The Shanghai Composite rose 4.2% during the first two weeks of April. The downward move was triggered by two developments: first, renewed worries over the situation in Europe, triggered by disappointing Spanish fiscal news; second, a number of weaker economic data releases, such as the March US labor market report and Chinese first-quarter GDP.
Market sentiment improved this week, but the question remains whether the setback marks the beginning of a new downtrend or was just a temporary correction? In our judgment, the global economic picture has not deteriorated and Europe is better positioned to contain the debt crisis. Thus, the recent downward move should be seen as a healthy correction after a quarter of double-digit equity gains. Having said that, the next few weeks are likely to remain volatile and could produce more declines, as the market digests the outcome of the French presidential election.
Growth is spreading
The better-than-expected growth picture so far this year was largely driven by the US. Markets were disappointed by the March labor market report, but the underlying trend remains healthy. Employment excluding the bubble areas (finance and construction) as well as the public sector is growing at a robust 2+% annual pace. Most parts of the US corporate sector are in good shape, a fact that the first quarter earnings reports have so far more than validated. As we move into the second quarter, there are more signs that the positive US growth picture is being supported by better economic news from other areas.
- The strongest growth sprouts are coming from the tech-heavy economies in Asia. These contributed much to the global downswing in the second half of 2011 and are now bouncing back. Orders are rising sharply, while inventories are low.
- Emerging markets policymakers are stepping up their easing efforts. Latest examples were Brazil and India. A special case is China. Its export sector has clearly been hurt more than anticipated by the weakness in Europe. Second, policy easing has unfolded slower than expected. Nevertheless, monetary policy is turning and starting to have an impact. More important than interest rates and reserve ratios is the direct allocation of credit. New loan growth surged in March after a year of stagnation. And while Q1 GDP disappointed, March figures were stronger, notably retail sales. The outperformance of Chinese stocks so far in April suggests that the market is sensing better news.
- Europe is at the tail end, yet recent upward revisions of forecasts by the IMF and others, although small, suggest that the region is not in an unstoppable downward spiral. Within the Euro area, however, the growth gap between the core and the periphery remains wide.
- As in China, the impact of the Euro debt crisis on Germany has been larger than anticipated. This was evident in production and order figures. However, that has not dented business sentiment and employment growth. Indeed, the leading German economics institutes all raised their growth forecast for 2012 as well as 2013.
Muddling through continues
The renewed tensions in the Euro area are often interpreted as proof that monetary policy is running out of options. That is wrong. It is the credibility of policies in countries like Spain and Italy and not the failure of monetary policy that lies behind the widening of sovereign spreads. The primary aim of the ECBs liquidity operations was to avert a banking crisis. That banks used some of the money to buy government bonds was a welcome side effect. Reports from the banking sector as well as interbank spreads (OIS-Euribor) show that the ECB's liquidity operations remain a success.
The recent tensions have been a wakeup call for those who thought that the Euro debt crisis may be coming to an end. As we have pointed out before, the ECB can ensure that the financial system will not collapse, but it cannot solve the fiscal and structural problems. That is the job of governments. In fact, the widening of spreads - as long as it does not get out of control and create systemic risks - helps put pressure on governments to stay on course. The key here is credibility. Announcing optimistic growth and budget targets and then failing to reach them does not help credibility. More important is consistent reform progress.
In that respect, the labor market reforms in Spain and Italy, although not as radical as some had hoped, are important steps forward in a process that is likely to take several years. ECB, EFSF/ESM and IMF have so far stayed on the sidelines. That was good so and markets should not underestimate their capacity to intervene if necessary. The Euro zone is better positioned than last year should tensions turn into turmoil. The ECB is ready and able to put out any acute fire, especially through liquidity and direct market operations, while the EFSF/ESM can provide more long-term funding, thanks to its increased size and mandate. In the case of Spain, for example, the EFSF/ESM may help the most by assisting the bank recapitalizing through debt-equity swaps.
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor, and was first published 20 April 2012, Silvia Quandt Research GmbH, Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt.
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(f) or the analyst covering the issue has other significant financial interests with respect to the company or companies that are the subject of this analysis, for example holding a seat on the company's boards.
In this respective analysis the following of the above-mentioned conflicts of interests exist: none
Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG, and its affiliated companies regularly hold shares of the analysed company or companies in their trading portfolios. The views expressed in this analysis reflect the personal views of the analyst about the subject securities or issuers. No part of the analyst's compensation was, is or will be directly or indirectly tied to the specific recommendations or views expressed in this analysis. It has not been determined in advance whether and at what intervals this report will be updated.
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Frankfurt am Main, 20.04.2012
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