2012 Global Comeback Story: Europe
It was exactly this time last year that multiple investment banks presented their 2012 market and economic outlook. Each of the commentaries included strong concern for a favorable resolution to the European debt crisis and the systemic risk it presented to global capital markets. But here we are just 11 days before we flip the calendar into 2013 and Europe actually has been a source of strength as the U.S. works through the fiscal cliff negotiation.
Much of the favorable contribution comes directly from Germany, the pulse of Europe. As I wrote in my Q1 2013 Playbook “as goes Germany, so goes Europe.” This morning, German Business Confidence (Figure 1.1) rose to 102.4 from 101.4, the second consecutive monthly rise after touching 100.0 just two months ago. Similar to the U.S., the services component of the German economy also remains strong with a recent PMI (Figure 1.2) reading of 52.1. It all translates into the German equity market (DAX) (Figure 1.3) continuing to record fresh highs for 2012, up 33% for the year, leading all developed and emerging market equity indices.
The strong German pulse is strengthening the health of the rest of Europe’s capital markets. The eurocurrency (Figure 1.4), currently trading 1.3279, is charging toward the upper end of this year’s 1.2842 to 1.3487 trading range. The yield on Spain’s 10-year bond (Figure 1.5) continues to trade near the low end of this year’s 4.832% to 7.751% trading range. In fact, just yesterday Standard & Poor’s raised Greece’s credit rating to B- from selective default. Just take a look at the chart below of the Greek 10-year Treasury (Figure 1.6); not many 2012 outlooks had the yield declining from 44% on March 9, 2012 to the current 12%.
For 2013, investors will need to continue to look toward European financial markets; the time to look away has not passed. There will be moments in 2013 when headwinds present themselves. I am particularly concerned with the economic health of France. However, as long as Mario Draghi keeps his “buyer of last resort” pledge and Germany’s pulse remains strong, Europe will continue to contribute favorably to global capital markets. What a difference a year makes … certainly a comeback story.
Figure 1.1 German Business Confidence 12/31/09 to Present
Figure 1.2 German PMI Services 12/31/09 to Present
Figure 1.3 German DAX Year to Date
Figure 1.4 Eurocurrency Year to Date
Figure 1.5 Spain 10-Year Bond Year to Date
Figure 1.6 Greece 10-Year Bond Year to Date