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The onset of deflation in the Eurozone is likely to see the European Central Bank come through with additional QE. Consumer prices within the Eurozone economy fell by 0.1% in September on an annual basis due to an 8.9% annual fall in energy prices. This compares to 0.1% consumer price inflation in August. Printing more euros is likely to be the most probable outcome here. Eurozone growth fell back to 0.4% in the second quarter from the 0.5% seen in the first quarter.
Before the CPI data was released, the rating agency Standard & Poor’s, forecast that the ECB will extend its QE programme beyond September 2016. The S&P Agency predicts that the QE programme will last to 2018 and could reach €2.4 trillion – double the original €1.1 trillion. I believe this outcome is a certainty.
Eurozone unemployment remained at 11% in August and this intensifies the pressure on the Central Bank to ease further. Also, while the rate of unemployment in the Eurozone has improved, it remains high. In some countries such as Spain it is on a par with the levels seen in the US during the Great Depression in the 1930’s.
The trend though is moving in the right direction and the latest EU unemployment data is down on the peak rate of 12.1% in 2013. Italian unemployment also came in at 2.5 year low, falling to 11.9% in August from 12% in July. Ten months ago Italian unemployment had been 13% while second quarter economic growth came in at 0.3%.
We continue to like select European stocks with defensive earnings and attractive valuations. In the Global Opportunities Portfolio we are selectively adding to our European (and Indian) exposures after selling down our Japan and China equity holdings several months ago.
The STOXX has significant support at the key 300 level. I don’t envision the index breaking down below this level during the correction, or anytime soon for that matter, barring a significant left of field event – such as Russia and the US having a military confrontation in Syria.
Further support is present at around 324 and this could also hold and prove to be the low point during the current correction. Valuation support and dividend yields are now attractive to investors and I see the ECB boosting confidence with additional stimulus.
In the UK, Q2 GDP growth was confirmed at 0.7%. The final reading matched the earlier July estimate. The second quarter expansion at 0.7% was an improvement on the 0.4% rate of growth seen in the first quarter and shows the UK economy moving in the right direction although recent data may see a moderation of growth in the third quarter.
The FTSE has valiantly held the 6000 level and once again valuation and yield support are playing an important role. Interest rates are on hold and will not be adjusted by the Bank of England any time soon. I don’t see the FTSE spending much time below the 6000 level and on each occasion, stocks have been aggressively bought.
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