Week End Blog – Politicians at the Gate

· by · in FINANCIAL MARKETS, MACRO. ·

Welcome to the Week End Blog. The Greek roller coaster has still not reached its end. After Germany rejected a Greek letter asking for a six-month ‘bridging’ period, another Eurogroup meeting, Friday the 20th, will now seek a sustainable result. And while Mr. Varoufakis has a very optimistic attitude towards reaching an agreement, he did not book a hotel for the night in Brussels, this could become a long one.

How will it end? I don’t know. How do things that look like this end?

At least the markets are very convinced that this new chapter in the European debt ‘crisis’ will get a happy end. I’m not sure if I should call it complacency but the following comes to mind. If it looks like a duck, swims like a duck, and quacks like a duck, then… European stocks have risen more than 10% since the start of the year, climbing a rather steep wall of worry.

With the market so upbeat, any signs of contagion are hard to find. Perhaps the only indicator that Greece could have spill over effects for the rest of Europe are bond yields. For a long time Italy’s spread over German bonds was significantly higher than that of Spain. But with the rise of Podemos in Spain the two spread levels have converged of late.

Interest levels for all Euro zone countries remain extremely low, though. To give you an idea, the difference between the 10-year Treasury and the 10-year bund yield has reached historical levels. You now get a ‘bonus’ of 1.7% for holding US government bonds.

There are, of course, obvious reasons for this difference in yield. Deflationary pressures are more visible in the Euro area. In fact, you have to look really hard to find any positive inflation numbers at all. These deflationary forces made the ECB to start its own QE program, pushing down yields even further.

The US is moving exactly in the opposite direction. Strong job growth and the first signs (finally) of a sustained increase in wages will allow the Fed to raise rates later this year. But with low inflation and monetary easing going on almost everywhere else in the world, Yellen will have to be brave to pull through.

Monetary policy is not the only thing that is diverging between Europe and the US. In recent weeks macro data in the US surprised on the downside while macro numbers in Europe came in above expectations. This divergence in the surprise indices explains much of the recent outperformance of European stocks.

One of these European macro surprises is consumer confidence. It took a while to get there, but consumers are currently the most optimistic since 2007!

This optimism is not shared everywhere in Europe, however. The Swiss are still digesting the decision by the SNB to drop the peg of the CHF to the EUR. Growth expectations collapsed since then. The Swiss can’t be happy with their central bank right now.

On average things look pretty upbeat in Europe. But, if you are thinking to allocate some money to European stocks, take a second to look at the chart below. Many investors agree with you and have overweight positions in the region.

Last but not least. Who’s winning the oldest battle out there? Men against women. Do stocks more liked by women beat stocks more liked by men? Wealth manager SigFig put out a piece that (again) showed that the overconfidence of men leads to inferior returns compared to women. It also showed that women like completely different companies than men. I tried to find out which companies yielded the better return. To see the results please click here.

Enjoy your weekend (both men and women)!

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