mercoledì 8 agosto 2012

Is it time to invest in the Italian equity market?

The economic data released over the last week confirmed that the Italian economy is in a dire recession:
1)      The Q2’s GDP contracted by 0.7% q/q – slightly better than market expectations at -0.8% q/q. It was the fourth consecutive quarterly decline: -0.8% q/q in Q1 ’12, -0.7% q/q in Q4 ’11 and -0.2% q/q in Q3 ’11. The year over year change fell from -1.4% in Q1 ’12 to -2.5% in Q2 ’12.
2)      In June, the Italian industrialproduction fell by 1.4% m/m, 1.7% q/q and 8.2% y/y.
The leading indicators released over the last few weeks signaled that a recovery of the Italian economy is not imminent:
1)      The Istat business confidence index was at 87.1 in July – only slightly above the 3 year low at 86.5 posted in May. The index signaled that the industrial production may contract by 10% y/y in Q3;
2)      The Istat consumer confidence index signaled that the consumer spending will continue to remain weak in H2 ’12 for the negative outlook of the labor market. According to the latest Eurostat’s data, the Italian unemployment rate rose to a multiyear high of 10.8% in June
However, despite the negative economic scenario, the Italian equity market strongly rebounded over the last few weeks: from the year-low at 12295 posted on July 25th, the FTSEMIB jumped by almost 20%.
The main reason behind the rebound of the equity markets were the expectations that the ECB may intervene in the secondary market to lower the government bond yields in Spain and Italy. Indeed, the equity market rally started after the ECBpresident Mario Draghi said on July 26th at the Global Investment Conference in London  that the ECB “will do whatever it takes to preserve the euro” and continued after the ECB announced at the end of the last week monetary policy meeting that it will start buying the Spanish and Italian government bonds on the secondary markets if the two countries will ask for the intervention of the EFSF/ESM.
Following the ECB announcement, the Italian government bond yields declined: the 2 year yield fell from 5% to 3.08% and the 10 year yields fell from 6.6% to 5.9%.
A steep decline of the government bond yields in Italy will have a strong impact on the Italian economy as:
1)      It will lower the interest expenses on the huge public debt (close to 120% of GDP);
2)      It will improve the outlook for the banking sector, which is highly exposed on the Government bonds;
3)      It will lower the cost of financing for the non-financial corporations.
For this reason, a further decline of the long-term Government Bond yield – i.e. a decline of 10 year BTP yield below 5.5% - is crucial for buying the Italian equity market in a medium term perspective. Since 1994 a simple trading strategy of buying the Italian equity markets (we used the Comit index as a benchmark) at the end of the month when the 10 year BTP yield was below the previous year yield and exiting from the market in the opposite case gained a 121% performance versus the -5% of a buy and hold strategy.
Another positive sign should be a rebounded of the business confidence index. In the past, a bottom of the business confidence index anticipated not only an improvement of the economic activity but also the start of an upward trend of the equity market. The next Istat business confidence index will be released on August 30th.

lunedì 30 luglio 2012

U.K. Q2 GDP: The Sterling Is Not A Safe Haven

In the UK, Q2 GDP data came out worse than expected, with a 0.7% q/q contraction. The consensus expectations were for a 0.2% q/q decline. Compared to the same period 1 year ago, the GDP contracted by 0.8%. The ONS indicated that (continue on seekingalpha)...

giovedì 26 luglio 2012

Very volatile data today in the USA

Economic data released today were very volatile: 1) Initial jobless claims fell from 388k to 353k vs market consensus. The data was very volatile in the last weeks due to plant shutdown and difficulties in seasonal adusting the data. However, the data is a positive indication for the labour market in July. Jobs creation in July may slightly below 100k. 2) durable goods orders rose by 1.6% m/m vs expectations at 0.3% m/m. The ex-transportation data fell by 1% m/m. The data is in line with the contination of a moderate of growth for the manufacturing sector in Q3.

Euro zone: M3 data rose but loans declined

The data for June released today by the ECB signalled that the Money supply growth accelerated slightly but loans to the private sector decreased. the M3 rate of growth rose from 3.1% y/y (revised from 2.9% y/y) to 3.2% y/y. The annual total credit growth to the private sector fell from -0.2% to -0.4%. Loans to household remained unchanged at +0.3% (for home purchases +0.8%, consumer credit -1.9%). Loans to financial corporations fell from 0.0% to -0.6% y/y. The latest data signals that the situation of the credit market is still dire and increases the possibilities that the ECB may further ease monetary policy over the next week.

mercoledì 25 luglio 2012

Italian consumer confidence rebounded in July

The Italian consumer confidence index unexpectedly rebounded from 85.4 in June - the historical low of the index - to 86.5 in July. The improvement was led by the view on the Italian economic outlook and a better view on the labour market. Despite the rebound in July the index remains on historically low level, signalling that consumer spending may continue contracting in Q3.

martedì 24 luglio 2012

S&P 500: Is It Too Risky Investing Now?

Despite the debt crisis in the eurozone, the signs of weakening of the economic growth in the USA and in China, the S&P 500 remains only 4% below the highest close since '08 posted on April 2nd at 1419. Over the last week, the index managed to gain 0.4%, with the decline on Friday (-1%) only limiting the performance. continue on seekingalpha

PMI indices: Euro zone outlook continues deteriorating

In our article "No Sign Of Relief In The Eurozone" we highlighted that the major business confidence indices due for release over this week should confirm that the Euro zone economic has been deteriorating fast.
The PMI indices for the Euro zone just released had mixed results despite confirning that an recovery is not coming anytime soon. Indeed, while the PMI manufacturing index unexpectedly fell from 45.1 to 44.1 vs market consensus at 45.2, the PMI services rose from 47.1 to 47.6 vs expectations for an unchanged reading. The PMI composite index remained unchanged at 46.4, a level in line with a 0.5% q/q contraction of the Euro zone GDP in Q3.

Moody's cut the German outlook to negative. Rating unchanged at AAA

Moody's decided to cut yesterday the outlook for Germany, Luxembourg and the Netherlands to negative but confirmed the AAA rating. The rating agency explained in a statement that: "The level of uncertainty about the outlook for the area and the potential impact of plausible scenarios on member states, are no longer consistent with stable outlooks".
The German Finance Ministry said the risks in the euro zone are “not new” and that Germany remains “in a very sound economic and financial situation.” In counterpoint to Moody’s, it cited the verdict of financial markets that have rewarded Germany with record low borrowing costs on government bonds.
The Moody's announcement may have a limited impact on the financial markets. After S&P stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose
Some links on the topic:

lunedì 23 luglio 2012

Euro zone consumer confidence index at the lowest since 2009

The European Commission consumer confidence index for the Euro zone fell in July from -19.8 to -21.6, the lowest since 2009. A rebound of the consumer confidence is unlikely until the outlook of the labour market does not improve. The data is line with a further contraction of the Euro zone GDP in Q3 and anticipates the continuation of the downward trend of the PMI indices due for release tomorrow.

No Sign Of Relief In The Eurozone

Over the next week, the most important event in the eurozone will be the release of the business confidence indices for July in the eurozone (PMI indices) and in Germany (IFO index).
We do not expect any improvement (continue on seekingalpha)

mercoledì 11 luglio 2012

Is The EUR/USD Heading Toward 1?

Last week's ECB decision to cut the Refi Rate and the deposit by 25bp - respectively to 0.75% and 0% - was not enough to push up the European equity markets as the CB did not give any indication on a further easing of monetary policy in the months ahead. (continue on seekinalpha)...

mercoledì 6 giugno 2012

ECB: The EU Leaders Should Resolve The Debt Crisis

In line with consensus expectations, the ECB decided to left rates unchanged at 1%. In the press conference at the end of the meeting, the ECB president Mario Draghi downgraded the view on the economic outlook. Indeed (continue on seekingalpha)...

mercoledì 2 maggio 2012

Where Is Monetary Policy In The Western World Headed?

The three major western Central Banks seem to have adopted a wait and see stance recently. Over the last week, the Federal Reserve highlighted its neutral bias. Chairman Bernanke said that (continue on seekingalpha)

martedì 24 aprile 2012

The negative outlook for the Euro zone

The major recent economic events were negative for the eurozone:

In France, the socialist candidate in the presidential election Mr.Hollande won the first round with 28.46% of the vote to 27.06% for the incumbent president Mr. Sarkozy. continue on seekingalpha