Macro Flash: Surveys show China’s recovery is strong but uneven
The released Official China NBS/CFLP PMI and the Caixin/IHS Markit PMI for August showed both that the Chinese economy was undergoing a robust growth recovery in August. However, the Official PMI shows that the economic recovery is uneven and is driven first and foremost by large manufacturing enterprises and by the construction sector., which benefited the most from the fiscal and monetary stimulus measures. Export orders continued their recovery initiated in June but the major driver of growth was domestic demand. Employment remained muted as companies still face uncertainties related to the COVI19 pandemic and its impact on economies across the world. Expectations remain anchored at a high level, although they edged lower compared to July and June.
Macro Flash: Eurozone recovery slowing down in August
The pace of recovery of the Eurozone economy following its sharp contraction in 2Q 2020 slowed down significantly in August. The Eurozone PMI Composite Index came up at 51.9, still largely in positive territory but significantly down from the 54.9 level reached in July. The Manufacturing Index remained on a healthy recovery trajectory thanks to the strong rebound observed in Germany (cf. our Macro Flash on German Manufacturing PMI) and despite the stagnation observed in France. However, the Services headline index came almost flat at 50.5, due to a marked growth slowdown in France and a return to contraction in Italy and Spain. Regardless of the softness observed in the Services sector, Confidence about the future continued to peak up reaching its highest level in two years. This confidence will need to be supported by additional monetary and fiscal stimulus, else it could fade out. Indeed, Eurozone inflation moved into negative territory for the first since 2016 and unemployment continued to grow across the Eurozone which bodes ill for domestic demand, especially given the record savings growth due to precautionary motives.
Macro Flash: Jobless recovery for the German industry
The final German Manufacturing PMI for August was up at 52.2 from July’s final 49.0. The figure was less upbeat than originally thought as it came 0.8 points below its earlier published Flash estimate. The New Orders improved sharply at 59.1 alongside Future Output (Expectations) at 60.8. However, some weaknesses remain as factory jobs were cut again although the rate of job shedding was the weakest in five months. This indicates that a reversal could happen as the initial Business output and confidence upturn observed in July-August comes following a plunge in manufacturing activity in 2Q 2020. The mechanical “rise from the abyss” effect may fade out in the coming months and the recovery may peter out if the underlying drivers of growth – i.e. domestic demand and external demand – do not live up to their current expectations.
Business & Geopolitics: A Welcome Stimulus for Russia’s Sovereign Tech Sector
The Russian Tech sector has witnessed a remarkable development over the last twenty years, moving out of a soviet state-led institutional and technological matrix into a beacon for flagship tech companies such as Kaspersky Lab, Telegram, Yandex and Ozon. The COVID-19 pandemic and recession presents both challenges and opportunities for Russia’s tech players.
Market focus: How smart is smart beta?
Professional Investors are familial with the Fama-French Factor model developed by Nobel Prize Laureate Eugene Fama with his colleague Kenneth French in the 1990s. According to this model, the expected return on a stock is the combination of the general equity market premium – the so-called beta of the single risk factor model – to which they added a “size premium” – on the premise that small cap stocks are expected to generate higher returns than large caps – and the value premium which is a reflection of a stock’s lower valuation compared to other stocks which trade higher on the basis of their expected earnings. This academic theory is at the heart of the so-called “smart beta” strategy based on ETFs – Exchange Traded Funds – which seek to replicate an exposure to the risk factors identified by Fama-French and by other pundits. However, since the beginning of the year, here have been a puzzling disconnect between “Growth stocks” and “Value stocks”.
Market focus: European Banks from resilience to consolidation
– Most European Banks are resilient to the economic fallout from the Coronavirus crisis as they enter into the crisis with significantly improved solvency indicators, compared to a decade ago.
– However, this resilience masks structural weaknesses which translate into lower performance and market valuations amid persistent banking fragmentation alongside national markets within Europe
– The Banking sector in Europe seems ripe for another wave of consolidation. The big question is whether regulators are also ready for that. The ECB seems to welcome this process but the challenge comes from other market regulators.
Coronavirus: an update with facts, figures and a few questions
The new coronavirus – COVID-19 or MERS-COV 2 – crossed the 10 million mark of reported cases and inflicted half a million deaths. Although many countries have managed to contain the spread of the pandemic, the number of reported cases and deaths continues to increase. the worst is yet to come, according to remarks made on June 29 by the WHO Director-General. How have different countries across the world dealt with the pandemic so far ? What is the effect of lockdowns on deaths from the COVID-19? Is there a risk of a second wave of the pandemic after the end of the lockdowns and the easing of social distancing measures?
Macro focus: How resilient are the GCC economies to the coronavirus recession?
The GCC countries have been hit hard by the most severe macroeconomic shock in their history as independent nations. The collapse of oil prices earlier this year dealt a heavy blow to oil exporters all around the world. While some of the GCC countries are among the most wealthy nations on earth, the oil crisis caused their fiscal balances and their current accounts to deteriorate sharply in the face of the twin oil shock and demand crisis provoked by the coronavirus. Beyond some common features, there are disparities in terms of resilience to the crisis and capacity to deal with its consequences. Leaving appart the special case of Dubai and to some extent Bahrain, the GCC governments must accelerate their efforts to transform their economies.
Business & Geopolitics: Europe’s New FDI screening regulations
On June 17 2020, ahead of a tense EU-China summit, the European Commission published a white paper on levelling the playing field as regards foreign subsidies. The white paper is the result of a yearlong inflexion in EU’s foreign policy and economic doctrine in order to adapt the European Union to the realities of a Multipolar World by promoting a model of open strategic autonomy and by acknowledging China as a “strategic competitor” and as a “strategic rival”.
Macro Focus: Discretion over rules. The Federal Reserve’s “puzzle and conquer” strategy
From its latest moves, it appears that the Federal Reserve has two important messages for the markets and for everyone else. 1. Don’t fight the Fed. 2. Don’t expect any guidance from the Fed.
These two messages are two facets of the same “puzzle and conquer” strategy that seeks to provide support to the economy and to the markets while preventing the spread moral hazard and the build-up of self-fulfilling market bubbles. This strategy is risky as it may err on either side by untertaining a haze of uncertainty over its course of actions. However, it is probably the best strategy as long as the macro outlook and the fiscal side of the policy mix equation remain difficult to project.