Tales From Three Continents
Three different continents delivered discouraging economic news today, but one was somewhat less discouraging than the other two. We’ll begin with the worst: Europe.
The latest resolution of the Greek debt crisis seemed to please a few people and probably bought a little time. It may even have saved the Euro currency union from breakup. Yet the underlying problems remain. New production data shows shrinking manufacturing and service sector output throughout the Euro zone. A state of recession is all but a formality. At the same time, rising taxes along with government austerity and higher energy costs make life increasingly expensive and uncomfortable. In France, for instance, inflation is running near a three-year high.
On to Asia: Chinese authorities responded to falling exports by reducing bank reserve requirements earlier this week. In theory, this should spur lending and make capital easier to obtain. Is that really what China needs at this point? The jury is still out.
And the U.S.? Today’s weakness aside, stock benchmarks are still near long-term high points. Momentum in technology and financial services could be enough to create some key breakouts. Housing data is also looking a little better, and the Obama administration wants to cut corporate income tax rates. These are all positive signs. But as we keep saying, much more is needed. There is a difference between being “healthy” and being “less than dead”.
Technology and Financials still lead the sector race today. Of the two, Technology seems to have the more sustainable trend – and definitely the most bullish momentum – but Financials can’t be discounted. Consumer Discretionary and Industrials hold third and fourth place, having switched positions since last week. At the other end of the scale, the main laggard remains Utilities with a single-digit but still positive score. Consumer Staples and Telecom are also near the bottom, relatively speaking, but both are actually performing fairly well.
The equity Style categories have changed little since last week. The preference for Growth over Value is still quite evident. This is particularly the case in the Large-cap universe. We also see additional evidence that stock investors are once again embracing risk. Mega Cap is lagging and is only slightly ahead of last-place Large Cap Value, and Micro Cap holds the lead, followed closely by Small Cap Growth.
China moved up and Latin America slipped, but the same four Global categories are still leading the chart: Emerging Markets, Latin America, the U.S. and China. The more interesting action was at the bottom tier. Japan strengthened considerably and moved up a notch. The United Kingdom, on the other hand, improved its momentum score but still lost ground in the race for relative strength. The U.K. and Japan are now tied, which seems to us like an odd situation that probably won’t last long. Canada also improved but is still in last place.
“The [euro zone] economy remains stuck in low gear. It’s indicative of a flatlining economy, maybe slightly contracting rather than a major slowdown. It doesn’t bode well for the first quarter.”
Peter Dixon, economist at Commerzbank
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