Disappearing Europe

SG’s Andrew Lapthorne has just publishing an interesting piece on the European equity market and the capital breakdown of market capitalisation. He writes that Ten years on from the start of the financial crisis, the US equity market has gone from strength to strength and now represents over 50% of the world’s market capitalisation, a level not seen since 2001. Most of those market share gains over the last 10 years have been at the expense of Europe, where market cap share has dropped from 30% to 20% over the same period. Some might argue that this is due to the over valuation of US equities versus the rest of the world, and to a certain degree that may be true, writes Lapthorne. However, the bigger reason is perhaps more worrying for Europe; European quoted sector profits are now only 50% of US quoted sector profits, having been the roughly same just prior to the financial crisis, and are now back at levels last seen in 1984 when there were far fewer listed European equities. SG clients can access the full note by clicking below.

UK Inflation: What Lies Beneath

Polarisation of inflation expectations and a strong reaction to the loosening of policy in August 2016 create conditions for excessive inflation, argues Christophe Duval-Kieffer, inflation strategist at Nomura. Simultaneously, the sterling depreciation reduces the UK’s contribution to the global disinflationary cycle. Taking a look at Survey-based UK inflation expectations and the change in the monetary policy framework, this report discusses the loop between policy decisions and the exchange rate on inflation markets. Is UK inflation much worse than it appears? Nomura clients can read the full piece here. Click below.

European Equities and ECB QE Unwinds

Quant Insight’s research is built on an analytical framework conceived by a group of macro hedge fund portfolio managers and Cambridge University academics. Their framework looks to understand asset price movements and valuations, and distils signals from its quant models that cover thousands of securities in real time. Their secret sauce is that they use algorithms to untangle and isolate which macro variables (typically correlated) are driving asset prices. They’ve taken a closer look at the sensitivity of equity markets to QE unwinding, which includes sensitivity analysis which screens to see which European indices/sectors/sector pairs (for the long-short investors) will benefit or suffer when EUR 1y5y normalised rate vol (proxy for ECB QE expectations) and ZC EUR inflation swaps in 2,5 and 10-year (proxy for EZ inflation expectations) both rise one daily standard deviation. The results are fascinating and go against the widely held view that equities would sell off in a QE unwinding phase. The results show that both the FTSE MIB and CAC40 go higher with higher rate vol and higher inflation expectations. Huw Roberts at QI says that this is vital information for investors, because for years equities have needed CBs to maintain an easy money environment. Now – presumably because the cyclical upswing is sufficiently entrenched – risky assets are now viewed through economic fundamentals rather than just the “kool aid” from the ECB punch bowl, concludes Roberts. Click below to contact QI for more on this analysis.

Is a 2018 Bear Market Coming?

Although policy-makers have vowed to tread slowly in reversing QE, cross-border flows could easily overpower their good intentions, says Cross Border Capital. As experts on central bank liquidity, this London-based independent research firm focuses on monitoring and analyzing global liquidity funds. In September’s Global View edition, CBC assesses the probability of a major market correction, here defined as a drop of around 20%, or more, in World stock market prices. The model is informed by machine-learning techniques and incorporates the balance between cross-border capital flows and the net liquidity injections or withdrawals by national Central Banks. It assesses the probability of a market correction 15-months ahead according to whether cross-border flows are excessively speculative and Central Banks are withholding liquidity. The results of indicate a bear market in World risk assets starting in 2018. Are Central Banks about to make another big error? Purchase this note on RSRCHXchange and ResearchPool, alternatively contact the provider directly.

Brexit and NAFTA

OM Research focuses on areas which are under-served and poorly represented in the sell side research space, yet are essential for a holistic and accurate understanding of present and future trends. They collate multiple various streams of newsflow analysis (the world in one page produced weekly), geopolitical analysis (thematic notes on issues of interest, plus higher-value geopolitical overlays), and a joined-up analysis which adds additional value to their modularised output – commodities (metals & mining), offshore, behavioural finance, technicals (both manual and systematic) and equities alpha capture. In this note OM Research says that the deliberate leaking/briefing of the press about UK interest in joining NAFTA was designed to do one thing – unblock the Brexit talks. They believe NAFTA is a plausible prospect and hence the EU should view it as such. This is the last card the UK had to play – meaning that it either works or the UK’s focus needs to move elsewhere. The probability of a final deal is at 40% but could go lower without a quick breakthrough, OM concludes. The piece can be purchased on AlphaExchange, or alternatively contact the provider directly.

The UK and NAFTA

 Jamie Davis from OM Research has put together some analysis following yesterday’s news that the UK could seek to join NAFTA if they cannot strike a deal with the EU on Brexit. DAvis writes that joining NAFTA would be a hell of an upheaval for the UK, in terms of regulations etc, but it is plausible and would push the centre of UK’s politics towards the right, permanently. This could be a rallying issue for almost all Conservatives to get behind, he says. In fact, it’s the UK’s last card in the Brexit negotiations, according to the OM report. They have tried ”let’s do a deal,” then ”we will pay for a deal,” now if ”you don’t do a deal we will become a state of the US inside Europe.” Can you imagine how much France and Germany would like that? OM ask. Davis and his team have already written several reports this year on how Brexit could forge new international alliances/divisions, these are available for purchase on AlphaExchange. Make no mistake, says Davis, this is a potential geopolitical pivot point with consequences for generations. Click below to contact OM Research directly about any of these reports.

China PMIs Slip: Real or Just Sentiment Driven?

Who better to talk about the Caixin China Manufacturing PMI than Caixin Insight Group. In this report they ask the question about whether the slippage in the manufacturing PMIs is an indication of an economic downturn, or just a change in sentiment. To be sure manufacturing is still expansionary, but the rate of growth is declining. At a  composite level, China’s PMIs are in decline, which Caixin Insight Group reckon means that 4Q China growth could be under pressure. Click below to request a trial with the Caixin service.

Where to Next for Greece?

MacroPolis is an insight service focussed on all things Greek, and one of the better resources on the nation and economy written in English The recent conclusion of the second programme review marks the start of a new chapter for Greece, ending a period of uncertainty and providing some clarity for the short- to medium-term. MacroPolis have just published a report that sets the scene for the post-review period, outlining the current state of affairs and highlighting the challenges and opportunities ahead. It is an invaluable guide to the dynamics likely to shape future developments, for anyone interested in investment in Greece. It updates the latest economic developments,
the political landscape, global factors, status of the programme and they focus on key sectors;  banking (NPL market), energy, logistics and
tourism. You can take a trial to access this report, or purchase the report and recieve a 1-year subscription.

All Roads Lead to the Fed; Go OW Equities

The evolution of the outlook for Fed policy is, in the view of Longview Economics, the single most important driver of price direction across global asset classes, the firm writes in its latest edition of its Quarterly Global Asset Allocation report. In this respect, weak US inflation, disappointing US macro data (particularly in 1H) and the ‘pricing out’ of Fed rate hikes this year has set the stage for the key top level themes in 2017, say Longview. Therefore, the overarching question for global asset allocators, is whether recent weakness in US inflation and the economy will persist – or whether it’s nothing more sinister than a temporary soft patch? Longview’s analysis suggests it’s the latter, with a likely re-acceleration of US economic activity, inflation and a re-pricing of interest rate expectations. In Longview’s analysis this means being overweight DM equities, and underweight all other asset classes based on a 6-month-to-2-year view. This piece can be purchased on wither ResearchPool, RSRCHXchange or AlphaExchange, alternatively contact the provider directly.

Commodity Outlook: Surfing Smaller Waves in 2018

With commodities boosted by the 2017 global growth upturn, Nick Exarhos from CIBC takes a more cautious stance for what prices might look like over the next two years, in this commodity outlook piece. With growth acceleration caused by central bank policy and China’s ongoing effect on resources, metals’ prices will continue to be supported over the balance of the year. However, for the next couple of years, falling supply will become a bigger driver of commodity profiles, argues Exarhos, who suggests that supply increases will be forthcoming thus creating to downward pressure on prices in the year ahead. CIBC explains its near-term view on metals and energy in this concentrated report. CIBC have kindly given us access to the full note. Click below.