LONDON, 15 September 2003 — Growth or gloom? European investors are leaning toward the latter, at least in the near term.
Stocks are down across the board for the second day running in Europe — their steepest fall of the month unraveling much of last week’s rapid run-up - while euro zone government bonds have held a firm bid and a healthy appetite despite supply risk.
Some 6.4 billion euros worth of new 10-year paper auctioned by Germany on Wednesday seemed to sail from the shelves.
The big beneficiary of all the uncertainty has been the euro.
It traded near a three-week high to the dollar on Wednesday with the greenback unable to shake off doubts about the pace of US recovery — somewhat perversely as euro zone companies and asset prices largely depend on it, but short term the prospect of still lower rates in the US makes the trade attractive.
Why European asset markets got so aggressively bullish so quickly is perplexing. “In truth the euro zone economy has been at a standstill for the last year,” David Brown, chief European economist at Bear Stearns, said. “With Germany, Italy and Holland already in recession, it will be a very close shave as to whether or not the euro zone as a whole eludes technical recession,” he said in a client note.
Stock markets might discount the future, but some investors clearly question whether a 25 percent rally on the DAX index this year is justified given Germany’s frail economic state? The 5.5 percent year-to-date rise on the pan-European FTSE Eurotop 300 index seems more realistic.
German Finance Minister Hans Eichel has already begun the process of managing down expectations for growth, officially forecast at a paltry 0.75 percent this year that many private sector economists consider far too ambitious.
Reasons to sell are stronger than reasons to buy in equity markets - at least for now.
News from a raft of European blue chip firms on Wednesday didn’t improve the situation either.
Accor reported a bigger than forecast drop in first-half core earnings and predicted full-year profit some 29 percent below 2002’s level and Bouygues posted a forecast-beating 10 percent rise in first-half operating profit, but said it expected 2003 sales to fall by 0.9 percent. Even good news seemed to be making the best of a bad lot.
Woolworth narrowed first half losses before tax, goodwill and exceptional items to 34.9 million pounds ($55.4 million), down 12 percent on the year-ago period and Dixons said sales so far this year had held steady despite the summer heatwave.
Many firms reporting first half earnings - worryingly the big financial institutions among them - have hesitated to give full year guidance because of the overhanging risks.
Economists at Morgan Stanley reckon that for its second-half euro zone recovery scenario to play out, manufacturers have got to turn expected third quarter stagnation into near three percent quarter-on-quarter growth by the end of the year.
That said the investment bank remains optimistic.
And if they’ve got their eye on technical factors and funding needs, maybe relative value investors with a long enough time horizon should too.
Germany’s trade surplus with the rest of the world, for example, widened in July to 14.1 billion euros, with exports rising 5.4 percent on the year to 57.8 billion euros and imports amounted to 43.7 billion euros, up 2.3 percent versus July 2002.