Bleak economic data in Europe hits equity markets – City comment
21 August 2014
Bleak economic data in Europe casts a shadow over equity markets this month.
Thu, 21 Aug 2014 | By Kean Marden, head of business services equity research, Jefferies InternationalBleak economic data in Europe casts a shadow over equity markets this month.
The German and Italian economies both contracted in Q2. France was flat, fragile and, as the country returns from August holidays, its politicians seem to have few solutions to those questioning how to eliminate the country’s budget deficit and revive a lacklustre labour market. Astonishingly, Italy slid into recession for the third time since 2008.
Results from recruitment firms echoed these trends, particularly in Germany where Randstad and Adecco’s revenues were weaker than analysts expected and momentum during the quarter deteriorated. Elsewhere, aside from an in-line Harvey Nash trading statement (which also highlighted subdued perm demand in Germany), recruiter newsflow has been limited over the summer.
These developments, combined with escalating tensions between Russia and Ukraine, have prompted a sharp shift in global investor sentiment towards Europe relative to the optimism that pervaded at the start of the year. Overseas investors have understandably scaled back their exposure and, according to Markit, Exchange Traded Funds have suffered $4bn (£2.4bn) net outflows over the past six weeks.
Nevertheless, there have been beacons of light in the gloom. Inflation is well under control in the UK and the US, which may prolong this period of record low interest rates. After a several months of weak data points, US housing starts jumped by 16% in July to the highest level since November 2013.
As is often the way, share prices had already discounted weak European economic developments and, emerging from a difficult couple of weeks at the start of August, the FTSE100 index has clawed back 2% over the past fortnight. In the recruitment sector, Hays (+11%) experienced a particularly powerful rebound and Michael Page and Empresaria appreciated by a more modest 4%. SThree (-4%) is the main laggard this month.
Fortunately, investors feel far more comfortable with the UK economy. UK growth is among the highest in the developed world at the moment and our discussions with investors have increasingly turned to the outlook for salaries. Official data remains subdued and the Bank of England recently halved its estimate of wage inflation this year. This seems strange because 10% inflation is emerging in some corners of the labour market, with skill shortages already evident in construction and property after only a few years of recovery.
The German and Italian economies both contracted in Q2. France was flat, fragile and, as the country returns from August holidays, its politicians seem to have few solutions to those questioning how to eliminate the country’s budget deficit and revive a lacklustre labour market. Astonishingly, Italy slid into recession for the third time since 2008.
Results from recruitment firms echoed these trends, particularly in Germany where Randstad and Adecco’s revenues were weaker than analysts expected and momentum during the quarter deteriorated. Elsewhere, aside from an in-line Harvey Nash trading statement (which also highlighted subdued perm demand in Germany), recruiter newsflow has been limited over the summer.
These developments, combined with escalating tensions between Russia and Ukraine, have prompted a sharp shift in global investor sentiment towards Europe relative to the optimism that pervaded at the start of the year. Overseas investors have understandably scaled back their exposure and, according to Markit, Exchange Traded Funds have suffered $4bn (£2.4bn) net outflows over the past six weeks.
Nevertheless, there have been beacons of light in the gloom. Inflation is well under control in the UK and the US, which may prolong this period of record low interest rates. After a several months of weak data points, US housing starts jumped by 16% in July to the highest level since November 2013.
As is often the way, share prices had already discounted weak European economic developments and, emerging from a difficult couple of weeks at the start of August, the FTSE100 index has clawed back 2% over the past fortnight. In the recruitment sector, Hays (+11%) experienced a particularly powerful rebound and Michael Page and Empresaria appreciated by a more modest 4%. SThree (-4%) is the main laggard this month.
Fortunately, investors feel far more comfortable with the UK economy. UK growth is among the highest in the developed world at the moment and our discussions with investors have increasingly turned to the outlook for salaries. Official data remains subdued and the Bank of England recently halved its estimate of wage inflation this year. This seems strange because 10% inflation is emerging in some corners of the labour market, with skill shortages already evident in construction and property after only a few years of recovery.
