Another month-end looms and before you know it June will be gone and we’ll all of a sudden be through the first half of the year, most of which has been spent staring at Washington.
We are all spellbound by the unpredictability of the Trump White House and the effect it is having on both the economy as it is and on the economy as the president has promised it is going to be. The closest one can come to getting one’s head around the issue is by trying to price where fantasy ends and where fact begins.
Meanwhile, Europe has been trudging along very much in the shadow of the overwhelming confusion that reigns in America. The presidency of St Mario at the ECB has offered a level of stability which has, to some extent, made Europe boring and predictable. Markets are supposed to love boring and predictable and they do when they don’t have it but once it has taken hold, they always seem to wish a little more “action”. Thus, and with a Fed tightening on June 14 close to being a racing certainty, eyes are now beginning to focus on the ECB and on the prospects for a little action there in light of the notably more benign looking economic outlook.
But whoever was banking on a tightening, or in some peoples vocabulary normalisation, of eurozone monetary policy being just around the corner was given a suitably cold shower as Draghi spoke yesterday in a set-piece to the European parliament’s Committee on Monetary and Economic Affairs. While acknowledging that the eurozone economy had shown 16 successive quarters of growth, that unemployment was at its lowest level since 2009 and that consumer sentiment was at a six-year high, he insisted that it was too early to consider pulling back from the ultra-loose monetary policy stance which is still being maintained by the central bank.
GET SMART
Cynics might suggest that as the debate over the succession of Draghi picks up speed and as it might become inevitable to let a German, in the form of the Bundesbank’s Jens Weidmann, have a crack at the presidency, that Draghi feels a need to pump as much cash as possible into the economy before a more hawkish successor might push for the table to be turned down. The significant divergence between the component national economies, such a key daily subject during the eurozone crisis, has not really gone away. One should never forget that Draghi, when one scratches the surface, is and remains an Italian and that he will, no matter how hard he tries not to, naturally empathise with the troubled economy and banking system in his home land.
Italy’s stability within the single currency block realistically depends to a significant extent on the Greek domino not falling. That poor, benighted country has a population of 11m burdened with €315bn of debt and a GDP that continues to fall. The Greeks miss one unachievable austerity target after another and yet we all seem to liberally accept that the next bailout package will, despite all the rhetoric, be forthcoming when required. The fact is that if that Greek domino were to fall, the Portuguese one and more critically, the Italian one might not be far behind. Draghi knows this and there can be little doubt that his thinking is to some extent influenced by that.
Whether a Weidmann-led ECB could act any differently is a matter of contention but there is little doubt that the rhetoric would change and with it, possibly, the way that markets respond. In the first five months of 2017 alone and with Draghi in dovish mode the Dax has nominally risen by 10% or by 16.21% in dollar terms, the Cac by 9.67% or 15.86%, respectively and Madrid’s Ibex by 16.38% or 22.95%. The Athens ASC index is up, despite heaven knows what is going on, by 20.75% nominal year to-date and by 27.55% if calculated in dollars. And then we get hot under the collar about an equity bubble in the US where the Dow is up 6.67% year to-date and the S&P by 7.91% and keep on getting told that Europe is the place to be.
A normalised five-year chart shows the currency unadjusted performance of the Dax and the Dow have swung heavily in favour of the former where, dividends excluded, the index has given 84% as opposed to the Dow which has risen by 58.5%. Only when the currency effect is included does the Dow overtake the Dax by rising by 92%.
BONANZA
So once again the old truism is on display that the key to successful investing lies in the currency mix. Thus, as we prepare our investment plans for H2 we need to focus on the currency call. Draghi, in reassuring the political masters that the loose monetary policy stance is not up for review – yet – is not only supporting the weaker southern European deficit-ridden fiscal budgets but he is also helping to keep the euro cheap. That in turn keeps Germany ticking over and a strong German economy keeps its people happy and less questioning of the cost of feeding 11m Greeks.
So is this the time to turn one’s back on the dollar, even though the FOMC is within spitting distance of the next move to higher rates, and to plough money into Europe? It is certainly the flavour of the month and as Keynes taught us, money is not made by buying what is cheap but by identifying what is about to become popular. As recently as last December the betting was on how long it would take for the euro to break the buck. Now the euro is back above US$1.11 and very close to where it stood before the US elections.
The call is not easy and the horizon not necessarily that close but on balance Europe really does look the better buy. The post-Draghi weakness in the euro most probably represents a better buying opportunity than it does a sell signal.
A busy week ahead on the economic release front driven by the hiatus of the US holiday yesterday and ending with payrolls on Friday. The consensus forecast of 185,000 for the non-farm payrolls indicates a lack of conviction either way and despite the heavy schedule, the markets are more likely to find themselves momentum driven than anything else.