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US stocks are looking through this year’s earnings collapse in the expectation that 2021 is a more realistic picture of underlying economic activity. We agree, but we expect 2021 earnings will be well below consensus expectations. The COVID-19 crisis will not turn into a benign market environment next year.
And while many investors have bought risk with abandon after the Fed spread a QE-safety-net across most US assets, we see the logical end-point of Fed policy as a long-run sell signal as misallocation of capital means potential growth will decline and with it expected returns.READ ME
We remain convinced bears – index down at least 20% is our starting point. Investor belief in full ‘e’ recovery in 2021 contradicts economic outlook, we see 2021 earnings still 20% down from 2019.
Such is the self-confidence driving stock prices higher that the comparison of current forward p/e ratios to their only precedent, the 1999-2000 tech bubble, suggests a comparison with the 2½-3-year bear market that slumped in 2000 and finally ended in early 2003.
Asset prices are over-boosted by the monetary-policy monopoly that has been driven since 2011. Shift to Keynesian deficits = less ultra-easy money in future, which will undermine overvalued stock prices going forward.READ ME
As lockdowns begin to be eased around the world and infection rates slow, we mark-to-market our view against the roadmap we originally laid out back in March. Most developments fit in with our framework – revisions ratios and economic surprises are rising, for example. But central bank support has limited the risk of a credit blowout – and of course the equity market continues to defy gravity.READ ME
Tax cuts, fiscal support and loan forbearance only go so far: people cannot spend extra money when they are locked down. We have downgraded our growth forecasts, to of -17% for Q2 and -7.6% for Q3 GDP in the US (q/q SAAR). And this means the likely decline in S&P earnings will be in the region of 30%. This, and some weak-economy erosion of forward p/e ratios imply a fair value for the S&P index down into the 1600-1800 range.
But that’s not all. Debts built up in the last dozen years of easy money will mean squeezed margins create vulnerability in the US, also France and possibly Japan.READ ME
A Bloomberg survey in late June showed only 42% of the economists surveyed expected the ECB to restart the asset purchase programme.
Expect more rate cuts, deposit tiering and QE-II in September
The central bank kept its key policy rates unchanged at this week’s policy meeting but set the stage for rate cuts and a package of easing measures, likely to be announced in September.
We continue to expect a package of measures to be announced in September, when the new set of staff macroeconomic projections are released. The steps are likely to include a rate cut, the introduction of a multi-tiered deposit rate and the restart of QE. The Governing Council may also drop the practice of saying how long it expects policy rates to stay where they are or fall further.
On 12 September the ECB announced a stimulus package delivering all the elements we had forecast: a 10bp rate cut, reserve tiering, restarting QE and removing any date reference in its forward guidance.
The impact of one-off drags on domestic demand is fading. Surveys signal more consumption and investment to come. While data remain mixed, the stock market points to resilience.
Our long-held view that the aggregate euro area (EA) economy was headed for a sharper and more prolonged slowdown than many expected is now consensus. But the importance of a nuanced approach to the analysis of major EA countries remains largely underappreciated. France and Spain are cases in point. In this note we develop an argument we’ve been making for being relatively bullish on France.
Like elsewhere in the EA, risks to growth are mounting in France, but the outlook is still positive. Against the backdrop of a further slowdown in the rest of the EA (especially in Germany and Italy, which could even contract in real terms), France’s outlook appears quite rosy.
Interestingly, the stock market provides a key to sifting through contradictory cues. French large caps have underperformed small caps since January. But small caps, which rely much more heavily on domestic demand, have done even better. So, this time, if you are not sure which data series is the most reliable indicator of what is happening to the French economy, just trust the stock market.
The French economy continued to outperform German growth. Despite the CAC falling 3.9% from date of publication to 28 August 2019 it has outperfomed the DAX (-5.8%), IBEX (-6.2%), MIB (-6.2%) and Eurostoxx 50 (-4.3%).
Trade war, tech confrontation and a cyclical bottom in the semiconductor cycle will combine to ensure an actual fall in Korean exports through 2019. Last year, semiconductor sales accounted for a staggering 92% of Korean export growth, a single product dependence more akin to an oil exporter than a tech hub. The payback is now coming as trade friction exacerbates a chip price collapse. Export growth ex semiconductors is far from benign, either. A rate cut and fiscal stimulus are coming in Q3, but this will be insufficient to offset the trade decline.
The Bank of Korea cut interest rates on 18th July, for the first time since 2016, surprising market expectations.
Euro area (EA) manufacturing continues to underperform. German manufacturing remains extremely fragile and faced with significant challenges, Spain and France, thanks to limited exposure to Asian export markets, have been showing signs of stabilisation.
As we highlighted in the past, Spain stands out as a relative winner among the four largest EA economies, mostly thanks to the very price-competitive position it acquired in the aftermath of the Global Financial Crisis and its greater dependence on intra-EA demand compared to Germany and Italy. Similar to Spain, French manufacturing has been insulated from the worst spillovers of the EM demand contraction and global trade slowdown.
German (and EA-wide) car production reflects the global slowdown and the retaliatory tariffs China imposed on car imports from the US. But other sectors are not faring well either – e.g. electrical components, metals and machinery. What’s more, the slowdown in foreign demand is now starting to filter through to domestic demand. More interestingly, and consistent with our expectations that German machinery and equipment capex is bound to slow markedly in the coming months, domestic capital goods orders have crashed and have also closed the gap with intermediate goods orders. In this context, the Bundesbank revision of Germany’s real GDP growth down to 0.6% for 2019 come as no surprise, and confirms our view that the slowdown in Germany and in other export-sensitive EA economies (e.g. Italy) will last for most of the current year.
All elements point to a continuation of the current stagnation in the euro area. Moderate optimism for Spanish and French data seems justified only in comparison to the bleak outlook for Germany.
As trade war sapped global growth and trade volumes Germany underperformed the rest of the euro area and entered technical recession in Q3 2019.
German preliminary Q1 GDP is softer than the headline suggests. Resurgent trade wars and weaker EM FX threaten the recovery. A negative contribution from net exports is already baked in the data.
Inventory is likely to have boosted domestic demand substantially. A mix of prolonged, unforeseen weakness in foreign demand and pre-Brexit stockpiling (perhaps also related to the acceleration of imports mentioned above) caused a build-up of inventory in Q1. Bottom line: as manufacturers constrain production and run down stocks of finished products in the coming quarter(s), a partial reversal of Germany’s current growth is on the cards.
More generally the global macroeconomic outlook has deteriorated markedly since President Trump imposed a new round of tariffs on China. A further ratcheting up of the US-China trade war is no longer a tail event. If Trump carries out his threat to levy duties on all Chinese imports, Beijing will have an incentive to double down on its credit stimulus, increasing the chances of a global rebound in 2019H2. However, non-oil emerging markets in S.E. Asia and Latin America are already suffering from a stronger dollar. S.E. Asia, LatAm and Turkey combined account for the same share of German exports as China. Adding Korea and Japan, which are not faring well either due to falling world trade, we get to 10% of total German exports – or about 4% of nominal annual GDP. In other words, the positive spillover effect of Chinese stimulus on export-dependent economies such as Germany and the rest of the EA could now be offset by further demand contraction in other major export markets. German growth seems poised to remain slow for longer and the balance of risks is now tilted to the downside.
Short-term German data continue to weaken to the extent that the authorities begin to contemplate fiscal stimulus.
Most commentators were predicting a swift growth recovery for Germany and the wider euro area in 2019H2.
Are you an optimist or a realist? Data are always open to interpretation and the same set of numbers can lead to different forecasts. The preliminary Q1 GDP figures for the euro area (EA) published yesterday are no exception. Optimists are reading the modest QoQ acceleration – both at EA aggregate level and in Italy – as a sign that the EA is out of the woods earlier than expected (see left-hand chart below). In contrast, we stick to our view that, although the worst of the slowdown might now be behind us, many indicators suggest that the current soft patch will last until the end of Q2.
First, exports are still struggling significantly. Second, the inventory build-up in Q1 implies lower production later this year. Third, consumption is the strongest driver of EA growth. Fourth, Spain confirms once more that it is an important EA growth engine. Finally, Italy requires extra care.
With ECB President Mario Draghi trying every rhetorical trick in the book to kindle inflation, real M1 starting to expand again and Chinese fiscal stimulus in the pipeline, we think EA growth is now testing a floor. However, no quick rebound seems in sight yet.
Euro area GDP continued to slow with Germany posting growth of -0.1% for Q2.
Charles Dumas joined TS Lombard in 1998, becoming Chief Economist in 2005. He is recognised as one of the world’s leading macroeconomic forecasters. He has written several books on the global economy, including ‘Globalisation Fractures’ (2010), which earned praise from Paul Volcker, former Fed chairman and adviser to President Obama: “In the midst of the struggle to deal with the international financial crisis, too little attention has been paid to the underlying imbalances … Charles Dumas spells it out in clear analysis and convincing detail.”
Charles has 40 years’ experience as an economist and financial markets professional. In the 1980s he was Head of Research for JP Morgan in London. In the 1970s he was Director of European Economics for General Motors.
Before that he worked on tax reform for the Conservative Party and as a journalist on The Economist newspaper. He was a Managing Director in JP Morgan's New York M&A department from 1988 to 1992 and had previously worked in its capital markets group in New York and London.
Larry has more than 35 years’ experience as an international economist and investment strategist working for major global financial institutions. Larry was a co-founder of Trusted Sources in 2007. He looks at cross-EM and macro strategy themes, identifying major global trends that originate in and/or impact on emerging economies. He was co-head of Emerging Debt Markets at Goldman Sachs before becoming global head of Emerging Market Research at Chase Manhattan Bank.
During the 1980s he was the head of economic committees responsible for advising creditor banks on restructuring the sovereign debt of Mexico, Brazil, Poland, Yugoslavia and Nigeria. Throughout his career Larry has focused on emerging markets, especially Brazil, China and Russia. He received a PhD in economics from the University of Chicago.
Steven joined the company in 2017. His professional experience as economist and portfolio manager began in the late 1970s.
It includes econometric modelling at Data Resources Inc., creating interest rate and FX derivatives strategies at Salomon Brothers, managing US and global fixed-income portfolios at OFFITBANK, being global head of fixed-income at Lazard Asset Management and, more recently, as Chief Economist at M Science he developed “big data” to underpin his analysis of the economy, central bank policies, and capital market pricing.
Aside from his extensive client-facing work, Steven is a well-known commentator on economic and financial issues, is frequently quoted in the financial press, appearing on TV and radio, and writing guest columns for financial publications.
Bo Zhuang joined TS Lombard in 2007 as an economist and went to Beijing three years later to establish the TS Lombard office which he heads. In his analysis he draws on his local experience, extensive travel through China and a network of expert sources. He focuses on China’s growth transition and the way its top-down policies affect the real economy. The main themes he covers include the country’s political-business cycle, shadow banking, municipal bonds, SOE reform, local government debt and the labour market. He has successfully called macro-economic developments since 2008, including growth, deflation, currency, reform, non-bank finance and debt.
Bo has a Master’s degree in economics from the University of Warwick and a Bachelor’s degree in economics and management from the University of London.
Dario Perkins joined the company in 2011 and is Managing Director, Global Macro. He covers a wide range of global macroeconomic themes and writes the fortnightly Macro Picture.
Dario has extensive experience as an economist in both the public and private sectors.
At the UK Treasury he co-ordinated Gordon Brown’s global economic forecasts and was responsible for designing the structure of the Bank of England’s Financial Policy Committee. He also produced an important review of the BoE following the 2008 crash.
At ABN AMRO he was the City’s top-rated European economist for three consecutive years, earning a reputation for his communication skills and central-bank forecasting record.
Shweta joined TS Lombard in 2011. She is Managing Director, Global Macro and Europe Economics. Shweta leads the coverage of euro area economics and ECB policy. She also focusses on international macro themes with an emphasis on identifying key trends and turning points in global financial flows.
Shweta started her career as a Researcher at the London School of Economics and Political Science (LSE). She has also worked as a Researcher at the UN. Before joining TS Lombard, she was an Economist at Morgan Stanley (MS) for four years in Mumbai and Singapore. At MS, she was a member of the top-rated Asia Economics team (Institutional Investor Survey).
Shweta is a regular commentator in TV and print media. She holds an M.Sc. in Economics from the LSE and an MSc. in Finance from the London Business School.
Konstantinos Venetis joined TS Lombard in February 2015. His coverage is global, with particular focus on the UK, Japan and the oil market. He has well-rounded experience in financial markets, starting his career at Bear Stearns’ investment banking division and subsequently working as a trader, fund manager and research analyst.
Konstantinos holds an M.Phil. in Economics and a B.A. in Philosophy, Politics & Economics from Oxford University.
Shumita Sharma Deveshwar joined TS Lombard in 2007. She heads the India team based in New Delhi and focuses on India’s macroeconomy. Major research themes include fiscal and monetary policy, and she has broad expertise in banking and consumer demand. She travels regularly to different regions of India to take the pulse on what's happening the ground.
Before joining TS Lombard, Shumita was the India economist for DSP Merrill Lynch in Mumbai. Prior to that, she reported on emerging markets, focusing on debt and macroeconomic issues, for Dow Jones Newswires in New York and covered the Indian economy for the same company from New Delhi. She completed her Master's degree in international relations at Yale University and has a Bachelor's degree in economics from Delhi University
Madina was educated at the Urals State Technical University in Yekaterinburg, where she majored in economics and management (focused on mining and manufacturing). She moved to Moscow for graduate studies in finance at the Higher School of Economics, where, before joining TS Lombard, she went on to become a lecturer in financial management. Madina also has experience in the Investments and Strategic Development Department in a major listed Russian steel group and in business journalism for a regional television network in the Urals.
Since joining TS Lombard in 2015, Madina has been producing analysis on the full range of top-down risks and opportunities for financial investment portfolios including Russian and other FSU assets (with a focus on Ukraine, Kazakhstan and Georgia).
Rory joined the company in 2018 as an economist covering China and South Korea. Prior to this Rory spent four years with PRC Macro Advisors, a Beijing based economic research firm specialising in China’s political economy. From 2016, Rory was located in Seoul where he led the company’s Korea research. During this period, he also continued to cover China, specialising in macroeconomic forecasting and industrial policy.
Rory has a BA (Joint Hons) in History & French from the University of Manchester. Rory was awarded two Chinese government scholarships in Economics and Mandarin, and obtained an MSc in Economics from Beijing Normal University in 2014. Rory speaks fluent Mandarin and French, and advanced Korean.
Davide joined the TS Lombard Macro team in January 2017. He covers various global macroeconomic themes with a focus on the euro area. Davide’s research interests include central bank liquidity, inflation, labour markets and global supply chains.
Prior to this, Davide spent a year and a half working for the Securities and Finance practice of NERA Economic Consulting in London, where he focussed on asset pricing. Davide graduated in Economics from Bocconi University in 2013, holds an M.Sc. in Economics and Management from London School of Economics.
Wilson joined the company in 2018 as an economist covering Brazil. Prior to this Wilson spent two years with the Bank of America Merrill Lynch economic research & fixed income strategy team in Sao Paulo covering Brazil economics and politics, after having worked at AXA Insurances with risk underwriting.
Wilson has a BSc in Economics from the University of Sao Paulo. He was awarded with an academic merit scholarship in Economics and spent one semester at the University of Coimbra, in Portugal. Wilson also studied Financial Modelling at Insper, in Sao Paulo. He speaks fluent English and Portuguese, and advanced Spanish.
Krzysztof has joined the company in 2018 as an economist covering South East Asia. He previously worked at CIMB Bank in Kuala Lumpur as a Research Fellow where he led preparation and production of consolidated ASEAN and individual country macroeconomic outlooks. His experience also includes internships in Rothschild Global Advisory and IBM.
He holds a BA and MA in Quantitative Methods in Economics from Warsaw School of Economics and a MSc in Corporate Finance from Cass Business School.
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