Thursday marked the beginning three days of voting across the 28 EU nations in the first European Parliamentary (EP) elections since 2009. Also, the first pan-EU elections since the eurozone’s debt crisis and 18-month long recession that ended in mid-2013. When the polls close, voters are expected to add more euroskeptics—members of parties favoring less federalism and, in some cases, leaving the euro. With euro jitters still lingering in the background, some suspect this will rekindle breakup fears anew. However, polls suggest euroskeptics gain some ground but fail to shift power away from more traditional European political parties. The movement toward a more integrated Europe likely continues and, with it, support for the common currency likely remains strong. Should polls hold true, the biggest influence I believe the euroskeptics may have is pressuring the pro-euro groups on economic policy.
European Union Government
European Council: Heads of each EU member state with no formal legislative power. The Council defines general EU political directions (and addresses crises).
European Commission (EC): Executive body of the EU, consisting of a President (elected by the European Parliament) and 27 commissioners selected by the European Council and the EU President. They are responsible for proposing legislation, implementing decisions and addressing day-to-day EU operations.
European Parliament (EP): Directly elected legislative body of the European Union (five-year terms). The EP is an approval body. They do not initiate legislation, instead voting on and amending European Commission proposals. The EP directly elects the European Commission President and confirms the European Commission after its formation.
There will be slight structural differences in Parliament, regardless of the voting. Between 2009’s election and this year’s, the EU ratified the Lisbon Treaty, altering the structure of the body, modestly reducing the influence of larger nations like Germany. The EP will consist of 751 seats, 15 fewer than before. Representation will still be based on population, but with certain caveats. The Lisbon Treaty caps each member state at a maximum of 96 and mandates a minimum of six seats to all. This will automatically reduce Germany’s standing from the present Parliament and slightly boost the power of small EU nations. However, national distribution isn’t really at issue in the race. It’s much more about pro-euro versus euroskeptic.
|By Christo Barker, 03/28/2014|
It seems the IRS is going global, a development that has some pundits up in arms about potential stock market impact. The Foreign Account Tax Compliance Act (FATCA) is what I’m referring to. Under FATCA, the IRS is moving toward taxing US citizens’ offshore financial activity, including money held in banks abroad—effectively eliminating “tax havens” for US citizens. US expatriates and foreign banks are up in arms. The law conflicts with local banking laws in other countries, and banks have responded by simply slashing access to banking services for Americans living abroad. But while it creates hassles, barring a big international regulatory blowback, the law doesn’t seem poised to create many ripples for stocks.
FATCA, now four years old, was conjured following a 2009 scandal, which revealed a major Swiss bank was helping well-to-do Americans dodge taxes. The backlash against the scandal peaked in 2010, when Congress passed FATCA as a provision of HR 2847, the Hiring Incentives to Restore Employment Act. An effort to boost US government tax revenue by broadening the base, FATCA also has some grassroots appeal as it carries the label of reducing tax dodging. FATCA was supposedly a means to get fatcats to pay their fair share. (My apologies for the pun.) Foreign banks were also not the most popular group in the immediate aftermath of the Global Financial Crisis.
Initially, FATCA seeks to provide the IRS information about US citizens’ and green card holders’ taxable accounts exceeding $50,000 in market value held at foreign financial institutions. International banks (Foreign Financial Institutions or FFIs) are required to ink a special deal with the IRS, under which they report all US taxpayers’ qualifying accounts and holdings. Account disclosure began January 1, 2014. After June 30, 2014, foreign banks will have to provide details regarding investment account holdings, and by January 1, 2015, FATCA’s full implementation will install a 30% withholding on US sourced income (salary/capital gains/interest/dividends).
|By Fisher Investments Research Staff, 12/10/2013|
In its second release, Q3 US GDP was revised up to a seasonally adjusted annual rate of 3.6%—the fastest growth in more than a year and among the quickest rates in the current expansion to date. However, most economists and pundits greeted the acceleration with a resounding thud. Under the hood, they claim, the data were not so hot. Reason being, the most notable contributor to growth was increasing inventories, adding 1.7 percentage points to the headline number. Some posit this means growth is hollow—after all, inventory change is open to interpretation. It could be due to slowing sales, a potential negative for profits and growth ahead. Or due to inventory build ahead of an expected pick-up in sales this holiday season. If the pessimists are right, one would expect wholesale inventory growth to sharply slow as we enter Q4. Yet Tuesday, the first inventory report of the quarter suggested no such thing: US wholesale inventories grew at their fastest clip in two years.
In October, wholesale inventories grew 1.4% m/m (3.3% y/y) vs. estimates of 0.3%. Both durables and non-durables stockpiles grew (0.4% m/m and 3.0% m/m, respectively.) So what gives?
While inventory growth undoubtedly contributed strongly to GDP in Q3, that never meant inventories were at historically high levels. As Exhibit 1 shows, the inventory-to-sales ratio isn’t overall elevated. Total goods and non-durable goods are at relatively low levels compared to history, and while durable goods inventories are somewhat higher relative to sales, they are not alarmingly high. In short, there is nothing suggesting inventory growth is unsustainable overall relative to the pace of sales. Of course, maybe inventory growth does slow in the period ahead, but it wouldn’t seem to be related to overall overstocked shelves. This is yet another factor illustrating the fact reality may be considerably better than skeptics presume.
Five years ago, on Black Friday 2008, quantitative easing (QE) was born. In its quest to battle the deflationary effects of the financial panic, the Fed launched the “extraordinary” policy of buying long-term assets from banks. In exchange, the Fed credited banks’ reserve accounts, believing the banks would lend off these reserves many times over—a big money supply increase to boost growth.
To date, through multiple rounds of (now infinite) QE, the monetary base (M0) has swelled by nearly $3 trillion. Yet this economic expansion has been the slowest in post-war history.
Exhibit 1: Cumulative GDP Growth
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|By David A. Levine, The New York Times, 02/05/2016|
MarketMinder's View: Required reading for anyone investing for retirement. Heck, required reading for anyone investing, period. It guts just about every brokerage industry myth about how your age should influence your asset allocation—the mix of stocks, bonds and other securities in your portfolio—and shows how these myths can make you worse off over time. Here is a sample: “This consensus view, though, rests on a fallacy: the belief that as people grow older, their investment horizon shortens and, therefore, their ability to withstand volatility diminishes considerably. I would argue, instead, that there is an insufficient appreciation of just how apt the metaphor of the ‘investment horizon’ is. Just as a sailor sees but never reaches the horizon, the same is true for nearly all investors. A just-retired 66-year-old might expect that her assets will need to support her for a further life expectancy of only 20 to 21 years. But what happens if she treats that actuarial expectation as a certainty, spends too much each year, and ends up healthy and vigorous at age 87 with no assets left?”
|By Peter Eavis, The New York Times, 02/05/2016|
MarketMinder's View: This is really a mish-mosh of every false debt fear from the last six years, meandering between worries of high nonperforming loan forbearance stymieing new lending in the West and a toxic debt avalanche burying China, with some other stuff mixed in. None of it is really correct, and much of it confuses cause and effect. China, for example, has quietly dealt with occasional corporate defaults and bankruptcies for a couple years now, and they are isolated incidents (as you’d expect from a country growing over 6% a year). None have sparked even a hint of contagion. Also, when you exclude banks’ debt, China’s debt load becomes much smaller. Yes, there are nonperforming loans, but the central bank has been spearheading a clean-up effort for years, adding more transparency and market forces in the process—a generally positive development. As for the developed world, Italy’s situation is complicated by the eurozone’s new bank “bail in” rules, which force losses on shareholders and creditors when a bank gets in trouble, and trouble can include something as arbitrary as failing a stress test. Designing a bad loan clean-up system that doesn’t run afoul of those rules or arbitrarily select winners and losers takes time—this is a work in progress. And regarding US banks’ loans to troubled energy firms, those represent the tiniest sliver of US bank assets, and banks are already capitalized above and beyond Fed requirements. Look, global credit markets aren’t problem-free, but this piece just massively overstates the issue.
|By Ylan Q. Mui, The Washington Post, 02/05/2016|
MarketMinder's View: We like this coverage of January’s employment report because it doesn’t try to draw huge, sweeping forward-looking conclusions—which is the right way to do it, considering employment is a late-lagging indicator. A modest hiring slowdown should be expected after economic growth slowed in Q4, and it has no bearing on what comes next. Beyond that, it simply recaps some broad trends and highlights some noteworthy developments, like that 2.5% wage bump last year.
|By Max Colchester, David Enrich and Simon Clark, The Wall Street Journal, 02/05/2016|
MarketMinder's View: Eurozone banks have taken a hit lately, and if you’re curious as to what they’re dealing with, this piece presents a pretty fair look, though some of the risks seem a tad overstated. Regulatory issues and restructuring challenges are real, and European banks have been dealing with them for years now. This isn’t new news. Markets have long known most of these giant banks were jettisoning their investment-banking operations, making them more reliant on traditional lending—in turn making the yield curve a greater influence on profitability than it was when business models were more diverse. Eurozone yield curves have also been among the world’s flattest for more than a year. Maybe these issues are hitting sentiment to some degree, but they have minimal surprise power, and credit markets overall seem in fairly good shape. We’re inclined to wonder whether something else is hitting sentiment, like Portugal’s botched effort to shore up Novo Bank. This was the “good bank” that was created when Banco Espírito Santo failed during a 2014 accounting scandal. It was resolved then, according to the blueprint set when Cyprus was bailed out in 2013, and it all seemed fairly orderly and settled. But late last year Portugal’s central bank retroactively bailed in institutional bondholders to fill a capital shortfall, arbitrarily picking winners and losers. This happened right as the eurozone’s bank bail-in rules were taking effect, making folks question whether the same could happen elsewhere. It’s an understandable fear, but this was always going to be a trial-and-error process (and there will literally be a trial over this one). There were rumblings about something like this happening when bail-in was announced in 2013. The sentiment overhang could linger for a while, but it shouldn’t imperil the eurozone’s recovery.
Market Wrap-Up, Thursday, February 4, 2016
Below is a market summary as of market close Thursday, February 4, 2016:
- Global Equities: MSCI World (+0.5%)
- US Equities: S&P 500 (+0.2%)
- UK Equities: MSCI UK (+1.1%)
- Best Country: Norway (+5.0%)
- Worst Country: (-0.6%)
- Best Sector: Materials (+3.4%)
- Worst Sector: Consumer Staples (-0.8%)
Bond Yields: 10-year US Treasury yields fell -0.05 percentage point to 1.84%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.