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The Week in Global Markets

Stock markets summary:

– Europe: Shares had a mixed performance this week, with German, French, and Italian indices rising week-on-week, while the pan-European STOXX 600 index was almost flat, going up merely 0.08%. This came after EU, euro area and country-level inflation numbers were broadly higher than expected and went back up on a year-on-year basis. Some sectors performed better than others: industrial goods and services, as well as media stocks, were driving the price gains, and the aerospace and defense index also advanced driven by Airbus which gained 3.7% on positive orders and deliveries data. In the UK, with a better-than-expected GDP growth result for November (+0.3% MoM), the economy is still at risk of recession as 3-month growth figures Sep-Nov were still negative at -0.2%. Markets are now pricing in a slightly higher chance for BoE rate cuts to start in May. The FTSE 100 index went down on a weekly basis, with shares of luxury fashion group Burberry in particular falling to a 3-year low due to profit downgrade and challenge warnings as demand weakens.

– United States: Bank earnings this week marked the start of the Q4-23 earnings announcements, with mixed results for the last quarter. Most of the reported bank earnings beat expectations but the expectations for net interest income going forward have deteriorated. Overall, corporate profit expectations for 2024 have been rising, and positivism is still dominant, but valuations remain stretched – specifically in the mega-cap tech space. Earnings estimates for the next 12 months on the S&P 500 are now higher than the Dec-23 and the 2022 peaks. The Nasdaq, Dow, and the S&P 500 all went up this week.

– Asia-Pacific: The Nikkei 225 index reached a 33-year high thanks to an impressive performance of Japanese tech stocks. The other major index, Topix was also positively influenced by this development. Inflation in Japan continued to decline and numbers released this week showed levels aligned with expectations, with headline at 2.4% YoY and core CPI at 2.1%. Australia saw a positive surprise in terms of retail sales, which rose more than expected in November, most likely due to holiday and discount shopping. South Korea’s major stock index declined this week, which was partly driven by Samsung’s expectation of 35% YoY in operating profits for Q4-23. Another major highlight was the election in Taiwan which is expected to provide some relief to global markets on Monday, as China also made its statements a bit gentler after the results were out. However, the ruling party lost its parliamentary majority, which could mean more obstacles to implementing policy and a hit to market confidence.

– Bitcoin: One of the biggest news this week was the SEC approval for a bitcoin-spot ETFs. The fund is intended to broaden access to the most widely traded cryptocurrency for financial institutions and the wider set of financial market participants. 11 funds have received the green light, including those owned by BlackRock (IBIT), Fidelity (FBTC), Franklin Templeton (EZBC), Invesco (BTCO), VanEck (HODL), WisdomTree (BTCW), Hashdex (DEFI), Grayscale (GBTC), ARK 21Shares (ARKB), Valkyrie (BRRR), and Bitwise (BITB). This move is expected to be a major game-changer for the crypto space, as past applications were denied by the SEC on many occasions.

policy rate overview

The Central Banks of both South Korea and Poland kept their policy rates unchanged this week, at 3.5% and 5.75%, respectively. Next week, it’s Argentina’s turn. Inflation is still very high and the new libertarian government is attempting to address the economic crisis. Last week, it was announced that a new $3.2bn in hard currency-denominated 10-year bills will be issued to meet debt repayments. The central bank also plans to issue 10,000 and 20,000 peso bills as it hopes larger banknote denominations might make daily transactions simpler, otherwise, people are forced to fill backpacks with cash.

highlights from Germany

1. Industrial production and insolvencies
The industrial slump in Germany is far from over: November 2023 data shows production continued to decline in real terms: -0.7% MoM / -4.8% YoY in industry overall, and -2.9% MoM / -4.8% YoY in construction alone. This is a sixth consecutive month of decline, with production in energy-intensive sectors this time going up MoM, but still down 4% YoY. It was down for all categories of produced goods (capital -0.7%, intermediate -0.5%, and consumer -0.1%).

Factory orders (in real terms) were up 0.3% MoM in November, which was less than the 1% expected and 2.9% forecast. However, excluding large-ticket orders, they actually dropped 0.6% MoM. On an annual basis, they were still down 4.4%. The monthly development was driven by increases in the orders for capital and consumer goods, while intermediate goods orders declined. Domestic orders increase was driving the rise, with a +1.4% move up, while foreign orders fell by 0.4%, with new orders from the euro area declining by 1.9% and orders from the rest of the world increasing by 0.6%.

The construction sector in particular is unlikely to see a major turnaround soon, as the most recent report from the ifo Institute showed: the business climate in the sector is at an all-time-low, with escalating dissatisfaction, companies fearing further losses in the first half of 2024, and no sign of easing despite recent falls in home loan interest rates. Order cancellation seems to still be in full swing, while builders’ uncertainty is very high and 57% of companies surveyed report low backlogs.

Preliminary December data showed that insolvency applications are still rising – last month they likely went up 12.3% YoY. And final October data showed 1,481 filings – i.e., 19% more vs. October 2022. This represents €1.6bn of creditor claims and makes the total filings for the period January to October 2023 reach 14,751 or 24% higher than the year before (but still lower than the pre-Covid 2019 number by 7.7%). The hardest hit sectors are storage and transportation, as well as economic services. Consumer insolvencies were up 11.7% YoY in October.

2. Balance of Trade
Some positive developments can be seen in the external balance: it improved further in Nov-23 in nominal terms, reaching €20.4, as export growth (+3.7% MoM) outpaced import growth (+1.9% MoM). In annual terms, however, both exports and imports still declined compared to Nov-22, by -5% and -12.2%, respectively. Exports to EU countries, China and the UK were higher, but exports to the US, the largest export destination for Germany, were down 1.4% MoM. Imports from both within and outside the EU generally grew. The current account balance for November was higher than forecast and grew by over €10bn MoM to €30.8bn.

highlights from EUROPE

1. Retail Trade
European-Union-wide, retail trade volumes went down in real terms on a seasonally adjusted basis in November: -0.3% MoM and -1.1% YoY for the euro area; and -0.2% MoM / -1% YoY in the EU as a whole. Non-food items’ retail sales were the main driver, followed by food, tobacco and drinks, with Germany, Luxembourg and Austria driving the monthly drop, and Slovenia, Estonia and Hungary responsible for the annual development. There is some hope that in December these numbers might have edged up, given that consumer confidence has ticked up for that month. However, that has been accompanied by an increase in consumer inflation expectations as well, which are up to 10.5% for December.

2. Unemployment
Despite its ailing industries, Europe’s unemployment rate keeps declining: in November, it fell to 5.9% for the EU as a whole (vs. 6% in October), while in the euro area (EA) it declined to 6.4% (down from 6.5% in October). However, youth unemployment is still elevated at 14.5%, though it also fell in November. Overall, there are nearly 13 million unemployed persons in the EU and nearly 11 million in the EA, down by about 144k and 99k MoM, respectively. The country breakdown shows that particularly in Spain, Greece, France, Italy, Sweden, and Finland, the unemployment rates are still quite high above the EU/EA averages. And while they have been improving in Spain and Greece, the same cannot be said for the Nordic countries and France.

3. Economic Sentiment
The Economic Sentiment Indicator (ESI) increased in December for both the EU (+1.8pt to 95.6) and the euro area (+2.4pt to 96.4). This was driven by higher consumer confidence and management confidence in retail, trade, services, and construction. At the same time, industrial confidence remained broadly unchanged. The ESI improvements were observed in Italy, Spain, and Germany, among others, while it deteriorated in the Netherlands and France. Business expectations over the next 3 months went up for services but deteriorated for retail trade and were flat for industry. Employment expectations also ticked up due to more optimistic employment plans in the services and construction sectors, but in industry, those plans were slightly less upbeat, and in retail trade, they were basically flat. Consumer unemployment expectations remained broadly stable, while inflation expectations went up.

4. Financial sector
The European Banking Authority (EBA) published its Q3-2023 Risk Dashboard and one major highlight from it is the expected deterioration in asset quality among most bank portfolios over the next 12 months. This is especially true for those segments that are most vulnerable to high interest rates and economic downturn risks – i.e., consumer credit, residential and commercial real estate loans, as well as small and medium enterprises.

In addition to that, as of Q3, non-performing loan ratios and cost of risk remained relatively low and contained, but there are further signs of coming deterioration: stage 2 loans (i.e., those with significantly worsened credit quality) have started to grow a bit, with the ratio rising to 9.2% and the amount increasing by about €23bn.

highlights from the united states

Inflation Update
The US Consumer Price Index (CPI) increased 0.3% MoM and 3.4% YoY in December, which marked a rise in the headline rate of inflation, while core CPI continued to decrease. Key drivers of the headline increase were shelter and transportation services, which remain quite elevated on an annual basis. The index for energy rose for the first time since September, at a rate of 0.4% MoM, while it still declined on an annual basis (-2%). An important highlight is the difference between the rates for food and food away from home, with the rate for the latter remaining significantly higher than the former. Producer prices went down 0.1% MoM and rose 1% YoY which was less than consensus expectation.