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The Global Markets Weekly – 5/18/12
Camp David + Chicago = New Eurozone Policy Mix?
European policymakers mentioned the unmentionable, beginning to speak openly about Greece leaving the Eurozone. Even though they softened that view, as even Germany indicated that it wanted Greece to remain in the euro club, the cat is now out of the bag and equity markets continue to sag and bond yields fell.
Policymakers are meeting in two sessions in the U.S. and investors can only hope that a new policy mix is forthcoming that deals with the host of problems besetting the Eurozone: blending longer-term fiscal discipline, economic reforms and stronger fiscal oversight with efforts to support near-term growth (such as a pan-European financed investment bank, stretched-out deficit targets, and stronger domestic demand growth in the richer nations like Germany), a better capitalized banking sector with a pan-European regulator, a more accommodative central bank, and an acceptance that certain countries like Germany adopt an inflation rate higher than the 2% Eurozone target.
This is a tall order in the best of times and these are not the best of times with additional worries about the U.S. expansion fading like it did in 2011, the looming U.S. fiscal drag, and China slowing “too much.”
For these reasons, the investment implications are as follows:
- While DE remains strategically bullish on the U.S., DE has cut its equity exposure from 70% to 65%. DE is much more negative tactically.
- DE has adopted a greater allocation to fixed income, up from 25% to 30%.
- The DE cash strategic allocation is still 5%, with a much higher weight tactically until the dust settles.
- On alternatives, DE’s view on commodities/gold is now neutral, down from positive.
- On a country basis, strategic allocations continue to move away from Europe and toward U.S., Japan, and EM, but not to Russia and India but to Brazil and China.
- U.S.: The moderate dataflow on housing sales and durable goods is unlikely to change the consensus view that real GDP growth will be stuck around 2 1/4% not much different from Q1 pace. Only a few Fed speakers opine to possibly rattle the markets.
- Eurozone: Investors will be following the PMI flash figures as well as the going on in the U.S. The PMI readings have pointed to softer Q1 GDP readings than actually unfolded, however. Still, the April readings pointed to further downside risks for Q2. More solid readings may come from the Ifo and INSEE updates. The Q1 German GDP will be scanned for the how much of the surprising strength came from exports.
- UK: In DE’s view, the upcoming MPC minutes may imply that a much slower pace of growth is consistent with its inflation target, so the bar determining whether any further stimulus is needed may be higher than previously thought. While the CPI update will show a sharp drop, this may not feed into further strength in household spending, whose retail sales may reverse the March surge. The revised Q1 GDP data will confirm the economy is in recession, something the surveys do not support.
- Japan: The BOJ is expected to make no move policy moves this week, even though they are under political pressure to expand the balance sheet further. A small narrowing of the trade gap is expected for April, with both increases in exports and imports. A flat rather than rising core CPI result is expected for April. But will be evidence of stabilization and will not sound deflationary alarm bills yet.
- Emerging Markets/Regions: Few indicators of importance as the focus is on the question of whether a soft-landing is at hand in emerging markets. Data on prices in Singapore, Hong Kong and Malaysia should show continuation of well-behaved inflation. There are no central bank meetings of countries that we follow.