European market narratives are front and center again this morning, as disappointing sentiment data and continued conflict in eastern Ukraine give investors pause. Slowing production levels and low inflation appear to leave the door open for European Central Bank intervention but political support for action from European Union leaders is still far from consensus. With a strong correlation between primary global equity indexes that has been noted by multiple strategists in recent sessions, deteriorating investor confidence in Europe is likely to cast a shadow over U.S. equity markets in the near term.
Sentiment in Germany plunges. Centre for European Economic Research (ZEW) August economic sentiment data for Germany was released this morning with the headline index declining sharply to 44.3 from a prior 61.8 versus consensus forecasts for a reading of 54. Critically, the expectations subindex plummeted to 8.6 versus 27.1. In the wake of deteriorating industrial data for July released earlier this month, this shift in sentiment in the largest EU economy has significant implications for the euro zone as a whole. The euro declined against primary currencies this morning.
Geopolitical jitters abound. Despite some gains by Iraqi ground forces spurred by U.S. air strikes, the situation in Iraq remains fragile as Prime Minister Nouri al-Maliki’s administration continues to be under pressure. A Russian convoy carrying humanitarian aid to eastern Ukraine departed today in a move that is highly publicized by Kremlin-linked media outlets such as RT.
The Fed sends more dovish signals. In a speech in Stockholm yesterday, U.S. Federal Reserve Vice Chair Stanley Fischer warned of “disappointing” global growth levels and specifically cited remaining challenges for the U.S. housing market, government spending cuts and sluggish global growth that has tamped down U.S. export demand.
Mood at the cash register may have improved in July. In a report released yesterday, Société Générale economist Brian Jones forecast above-consensus gains for July U.S. retail sales data due tomorrow from the Census Bureau, after a disappointing 0.2 percent reading in June, thanks to labor market improvements and seasonal inflections.
Oil prices drift lower. Futures contracts for both Brent and WTI crude oil grades have reached multimonth lows in recent sessions, as robust supply data from U.S. producers offsets concerns over security in oil-producing nations in the Middle East. Forecasts for Energy Information Administration (EIA) inventory data due tomorrow are expected to continue to be strong on a seasonally adjusted basis.
Earnings season continues. U.S. equities reporting second-quarter earnings today include fashion companies Fossil and Kate Spade. Consumer discretionary companies have made largely upbeat announcements for the quarter to date.
Portfolio Perspective: The Fed’s Folly — David Young, Anfield Capital Management
The Fed has taken a hard line on its plans to raise policy rates, which seems folly to me. Ultra-loose monetary policy was first required to forestall systemwide failure during the depths of the 2008–’09 financial crisis. Then, as the economy struggled to regain forward momentum, a loose monetary regime was needed to spur economic growth and further support the beleaguered housing market. But nowthe Fed and its policy is pushing on the proverbial string.
Does anyone believe the economy needs — or wants, for that matter — the ocean of liquidity left sloshing around? In reality, the sheer magnitude of the financial economy relative to the real economy means the nature of U.S. economic cycles has changed. The old prescription of monetary stimulation until we saw the “whites of the eyes” of inflation no longer works. The real economy has not, and will not, consume the fuel of liquidity fast enough. This will leave all that money in the system, ultimately causing overheating in the financial economy at the growing risk of asset bubbles such as the U.S. Treasury curve and stock market. The likely result is that the Fed will be forced to raise interest rates sooner and faster than it has targeted. If excesses in the financial economy, magnified by tightening apertures, don’t force the Fed’s hand, then the pressure of capital seeking higher yields and returns through increased risk ultimately will. Where is Hyman Minsky when you need him?
David Young is the founder and CEO of Newport Beach, California–based registered investment adviser Anfield Capital Management.
