Europe: Still Steering the Emotional Roller Coaster
This week’s market action proved, definitively, that Europe is still the primary macro driver. As earnings season ramped up and QE rumors started it looked like Europe was taking a back seat. But that’s clearly not the case. The latest Credit Suisse Global Equity Investor Survey confirms this thinking. 54% of respondents say the biggest risk to the global economy remains Europe:
“Unsurprisingly, respondents continue to see the Euro-area crisis as the main threat to global growth over the next twelve months (54% of respondents, compared to 47% in the survey at our macro conference in May). However, the big change is China. In our May survey, only 1% respondents saw China as the most significant threat; this figure has now risen to 24% (for details on our own concerns about Chinese growth, see our report Q3 asset allocation: stay overweight equities, July 18).
Only 17% of respondents in our survey see the US fiscal cliff as the most significant macro risk, compared to 48% in May. However, US-based investors appear more concerned about the US fiscal cliff than their European peers, with 24% seeing it as the most important threat to the global growth outlook, compared to only 13% of UK respondents and 19% of those in Continental Europe.
Our view is that the actuality of the fiscal cliff itself could be a non-issue (we think fiscal tightening of 1½% of GDP is likely, compared to fiscal tightening of 1% of GDP in 2012). However, the threat of the the fiscal cliff may mean that corporates postpone capex and employment decisions to Q1 2013 when they hope there will be greater visibility on both the fiscal cliff and debt ceiling negotiations. The recent decline in CEO business confidence and Philly Fed capex spending intentions are signs that this might already be happening.”
Source: Credit Suisse
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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4 Comments
Greek yields appear not to have dropped as much as Spain, Italy. Further indication Greece is the omega wolf? Seems a bit contradictory.
Cullen, I can’t help but notice that Credit Suisse as recently as July 18 is recommending an overweight in equities, in sharp contrast to your recent algo call to go 100% cash. It seems that with Super Mario Draghi willing to do whatever it takes to save the euro, including ECB bond purchases of Spain’s and Italy’s bonds, that would push me into increasing exposure to equities for a little while, at least until we can gain visibility into the amounts, and extent of the ECB bond buys, and how long the program is likely to last. Yes, the biggest risk to the global economy is Europe, but the biggest risk to investors might be to miss out on rallies caused by ECB and Fed easing.
If the majority of equity investors think the Euro is the primary macro driver, then it probably isn’t. Were we not all focused on that, anemic, slowing growth would be the primary story, and it’s waiting patiently in the wings to take center stage the moment the Euro becomes a slightly less compelling diversion. Nice excuse for furious short-covering across the spectrum of risk, however. I still expect that the global environment is going to turn out to be much too uncertain to encourage aggressive risk-taking by businesses. And I don’t think consumers are going to suddenly open their wallets all over the globe simply because Europe may start printing a little more additional swag for the banking system.
I am wondering what can or will push the Eurozone political system to break. So far it has held together remarkably well. There are no serious political movements to exit the Euro in any State – not even in Greece!!!. If any State (except Greece) leaves the Euro, the whole Eurosystem is likely to fall apart. (I’m sure the system could handle a Grexit.) If Draghi is willing and able to buy enough Spanish and Italian bonds to keep the system going, the only way the Eurozone will fail is a political failure.