StreetAccount summary - EU weekly recap

StreetAccount Summary - EU Weekly Recap: STOXX Europe 600 (1.99%)
Friday, April 29, 2016 03:37:23 PM (GMT)

  • Overview:
    • European stock indexes ended at lower levels for the week amid a marked pick-up in global risk aversion, which favored traditional safe-haven/defensive assets such as gold, real estate equities, utilities and the Swiss franc.
    • German criticism over the ECB’s ultra-loose monetary policy intensified, drawing out President Draghi and Bundesbank chief Weidmann, both of who went of the defensive by stressing the importance of independence.
    • That said, the ECB’s QE ramp up last month to include non-financial corporate bonds was welcomed by a raft of large-cap European and US corporates, which took advantage of cheap borrowing costs to sell fresh debt.
    • There was finally some convergence in talks between Greece and its international creditors over current issues with Eurozone finance ministers looking to conclude the deal, together with contingency measures by early May.
    • Brexit debate remains the ongoing political story in the UK as a second week of campaigning led to a noticeable step-up in efforts by the Leave campaign to push for an exit with the support of a group of influential economists.
  • Global volatility spike favors safe-havens:
    • This week saw a notable spike in volatility amid further strengthening of the yen, which rose ~4.5% against the US dollar to end the week around the 106 handle after the BoJ disappointed market participants by resisting further easing – a move that went against expectations given thoughts that the central bank would attempt to stem the rise in the currency, which is up ~11.5% ytd. Sell-side analysts argued that the BoJ’s decision raises concern about a broader market read-across, causing investors to worry that policy easing has reached resistance levels in other regions/central banks too. That was reflected in the backup in government bond yields with the 10-year German bund ending ~7bps higher at 0.30%. There were mixed takeaways from the April FOMC meeting which left the door open for a June hike, but was broadly dovish in tone. Unsurprisingly, traditional safe-havens benefitted this week with gold up ~5.5% and the Swiss franc up ~2%. Dollar weakness propped up most metals and oil prices, which helped raw material and energy tocks end the week on the positive footing. There was also notable defensive positioning into real estate and utilities, which were both favored for their safe characteristics, particularly the former, given the ongoing tailwind it receives from record low Eurozone interest rates.
  • German criticism of ECB continues:
    • The rift between some German lawmakers and the ECB intensified this week amid reports that the country’s parliament wants to invite ECB President Draghi to explain the central bank’s accommodative policy in order to ascertain the implications on German savers. There was also more discussion about how the pushback against the ECB is unlikely to dissipate any time soon as its linked directly to domestic politics, which analysts say is driving the aggressive stance by some lawmakers in opposition to Chancellor Merkel. Note, as Germany heads for general elections next year, there’s expected to be more scrutiny over Merkel administration and the ECB’s mandate. While there was no response directly to the German invitation from Draghi, he did tell the country’s Bild newspaper that any perception of the ECB’s independence coming under attack can unsettle businesses and consumers, and could even postpone investment and spending. Bundesbank chief Weidmann (also an ECB member) was again forced to defend the institution, emphasizing that it cannot respond to the needs of individual countries.
  • Companies take advance of ECB QE:
    • One of the big themes this week was how the ECB’s QE ramp in March has further pushed down financing costs throughout debt markets, allowing companies to take advantage by selling low-yielding bonds due to the sharp drop in borrowing costs. Press noted that companies have rushed to sell new debt ahead of the official start of the ECB’s corporate bond buying, due June. The WSJ observed that the deluge of companies lining up to sell fresh debt raises the prospect of whether companies could one day persuade investors to pay them to borrow money, as some governments now do. Some of the notable names issuing debt include Sanofi (SAN.FP) (8.7%) Deutsche Telekom (DTE.GR) (3%), ThyssenKrupp (TKA.GR) (5.6%) and Unilever (ULVR.LN) (4.0%). A Bloomberg report said that US firms could also take advantage of cheap financing, with McDonald’s (MCD) reportedly marketing euro bonds. That said, there were concerns about liquidity issues, with comparisons being made to some of the challenges that the covered bond market has faced on ECB demand. There was also thoughts that program’s effect on the Eurozone economy is likely to be small.
  • Greece and creditors converge on talks:
    • After weeks of gridlock over concluding the first bailout review, there appeared to be some convergence between Athens and its creditors following intense meetings amongst Eurozone finance ministers. EU officials said all parties are close to a deal on a package of bailout reforms and are now working to agree on further contingency steps by 9-May when an extraordinary Eurogroup meeting will be held. Reports indicated that Greece and its lenders have almost reached a conclusion on reforms agreed within the current bailout program (which includes pension and income tax reform, a way to deal with bad loans and setting up a privatization fund), while other reports noted that more negotiations are needed on further contingency measures that Athens must commit to in exchange for debt relief negotiations. There were some thoughts that the insistence of extra reforms by lenders could result in further squeezes of state funds, which Kathimerini said are rapidly running dry. At the same time, caving into extra reforms by led to a pick-up in anti-austerity rhetoric by opposition Greek lawmakers who are calling for the resignation of Prime Minister Tsipras.
  • Leave campaign step up Brexit rhetoric:
    • While the Brexit debate in its second week of official campaigning still put the “Remain” camp in the lead in most polls (ORB poll for the Telegraph), the “Leave” camp stepped up efforts to build a case for Brexit. The London Times cited the latest YouGov poll which showed the Leave camp holds a one-point lead, indicating that US President Obama’s visit to Britain last week failed to meaningfully boost the Remain campaign, together with the UK Treasury’s analysis of Brexit risks. More importantly, for the first time, a group of eight influential economists publically supported the Leave camp, claiming that UK growth would be boosted by ~4% outside the EU, which drew strong criticism from the Remain camp after the IMF and OECD publicly opposed Brexit. Indeed, the OECD said that a Brexit would cost Britons a month's salary by 2020 and BoE Governor Carney reiterated that the uncertainty over the vote is the biggest risk currently facing the UK economy. There were also some remarks by EU officials who said that in the event of a Brexit, there was no appetite by Brussels to grant any extension of the 2 years provided by the EU's Lisbon Treaty for negotiating a withdrawal, and any new trade partnership would take many more years to conclude.
  • Sector Performance:
    • Notable outperformers: REITs +1.85%, Utilities +1.38%, Oil & Gas +0.56%, Construction & Materials +0.12%
    • Notable underperformers: Insurance (4.82%), Chemicals (3.49%), Health Care (3.19%), Retail (3.14%)

Subjects: Market Summaries - EU, Weekly Recap - EU