Analysts at BBH have been concerned that all the good news from Europe has now been discounted.
“The Eurozone’s solid and steady growth spurred talk that the ECB is too easy. Ironically, US growth was slightly lower than the Eurozone’s last year, but US unemployment (speaks to the output gap) is considerably lower and inflation considerably higher, and yet many observers, including former Treasury Secretary Summers, have been critical of the Fed for being too hawkish.”
“We have been concerned that all the good news from Europe has now been discounted. Unhedged European stocks, alongside emerging markets, were among the favored strategies in the first half. Macron's victory over Le Pen and the likely victory for Merkel in September is widely recognized. The fear of a populist-nationalist wave sweeping across Europe seemed to rise a bit after Brexit but accelerated with Trump's victory in the US. It was a distraction from the underlying structural issues in Europe. These have not been addressed. ECB President Draghi continues to plea for countries to implement structural reforms. The European Union itself has structural issues and institutional challenges, with or without the Britain.”
“We suspect Europe is near a peak. The Dutch don't have a government. The Finnish government nearly collapsed last week. Catalonia is planning a referendum in early Q4 which puts it at loggerheads with Madrid. In France, Macron is not the first French president to be elected on a reformist agenda and promise labor reforms. Sarkozy and Hollande promised reforms. A Merkel victory in Germany means that, whether in partnership with the FDP or the SPD, the basic thrust of German policy will not change. The chances of an early Italian election have faded, and the Five-Star Movement has done poorly in the local elections. However, it is not clear how closely a national election will track the local results. There were some idiosyncratic problems. There is still no agreement on the electoral law.”
“The economy too cannot do much better. Some confidence has shown the assessment of current conditions remains elevated, but expectations have begun slipping. The flash Eurozone PMI is expected to slip. It is expected to be small for both manufacturing (from Germany) and services (France), which will result in a lower composite reading. The magnitude is not significant; the direction could be a forewarning of a new economic phase.”
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