European equity and bond markets continue to feel selling pressure as the Greek drama continues to drag out during the final stage of the G7 meeting. International Monetary Fund managing director Christine Lagarde made comments today echoing the frustration of European Union finance ministers and indicated that an exit from the EU by the Adriatic nation is still quite possible. With no resolution in sight, investors in Europe enter this weekend as they did the last two, waiting for a signal that Athens is willing to accept EU austerity demands or is prepared to be the first state to leave the common currency region.
Swiss economy shrinks on lower exports. GDP data released today by the State Secretariat for Economic Affairs in Bern registered a 0.2 percent drop for the first three months of 2015, the largest contraction since the credit crisis. The reading was lower than economists’ consensus forecasts, as a stronger Swiss franc hurt export industries.
Moody’s raises bank ratings. Credit agency Moody’s Investors Service on Thursday raised its ratings on Bank of America Corp., Citigroup, Goldman Sachs Group and Morgan Stanley in a reversal of cuts made in 2012 in response to macro headwinds facing U.S. lenders. The review by Moody’s left JPMorgan Chase & Co.’s ratings unchanged in part due to that bank’s higher reliance on deposits than the other banks.
Private lending slips in euro zone. April lending data issued today by the European Central Bank registered weaker than forecast private sector credit growth at zero percent year-over-year. Increased capital requirements and uneven recovery in the peripheral EU economies have kept lending levels lower than central bank policymakers have targeted for years, particularly in smaller business segments.
JPMorgan to cut 5,000 jobs. JPMorgan has begun a cull of branch level employees that will remove at least 2 percent of its workforce by 2016. The eliminated positions primarily reflect a push by the bank to enhance productivity in retail banking outlets through upgraded technology but also will impact administrative staff in other segments.
Equinix to buy U.K.-based data firm. Data center and co-location provider Equinix announced today that it has agreed to acquire British rival Telecity Group in a cash and stock transaction totaling $3.6 billion. The merger will waylay earlier plans for Telecity to combine with Dutch firm Interxion.
China to allow increase foreign investments by citizens. Media reports in China today indicate that the State Council is preparing to relax rules that limit the ability of Chinese citizens to purchase financial assets such as stocks and bonds abroad. The move, which is initially to be limited to target free-trade regions, is the latest in a series of modest shifts by Beijing designed to make the yuan a more viable currency for international trade.
Household spending falls in Japan. Despite improving industrial output and employment data, household spending levels for April issued by the Statistics Bureau of Japan today contracted on a year-over-year basis. Reduced spending in the wake of sales tax increases has been a major stumbling block for the Abe administration’s attempts to increase growth and helped inflation to remain stubbornly low despite unprecedented easing measures by the Bank of Japan.
Portfolio Perspective: Germany: Lurking Deflation, Hidden Inflation — Sean Darby, Jefferies
According to the German Economic Institute, Germany has experienced more strikes the first few months of this year than for the whole of 2014. However, this surprising change in labor relations should not be too unexpected, as wage pressures started building from 2013, labor markets began to tighten and the minimum wage was formally introduced on January 1, 2015.
The surprising tone to labor markets seems to have been largely ignored by the German bund markets for the past two years. Much like the U.K., Germany is experiencing rising real incomes which ought to be fueling a consumer boom. The key to Europe’s recovery in our view is whether Germany’s deflationary savers can finally spend. Equally important, with real rates deeply negative, a construction boom is appearing on the horizon helped by firming house prices.
In the three months of this year, German GDP grew by 0.3 percent quarter-over-quarter and by 1 percent year-over-year. The economy is continuing to grow. Furthermore, inflation expectations are building based on ZEW while the propensity to consume is close to a 15-year high. Hence, it would seem that a barbell strategy would work well interplaying consumption and better underlying construction and building data. We continue to highlight beneficiaries of German reflation such as the tourism and spending basket and we remain bullish on the DAX within our global asset allocation and short bunds.
Sean Darby is the chief global equity strategist for Jefferies.
