Strategy: credit flowing in the US, not in the eurozone

Risk spreads on peripheral eurozone government bonds fell somewhat and several Dutch political parties agreed on an austerity package aimed at reducing the Dutch government budget deficit to 3% next year. This may avert a debt downgrade for now. US earnings numbers continued to outpace expectations. The equity markets posted modest gains.

US GDP growth fell in the first quarter to 2.2% QoQ annualised, from 3% in the final quarter of last year. The underlying details show a somewhat mixed picture. Consumption growth accelerated, but as consumption grew at a stronger pace than incomes, the savings rate fell. This has been the case in every quarter since the third quarter of 2010 and gives growth a bit of an unsustainable flavour.

The ISM-manufacturing index posted an unexpected increase in May, after several regional indicators of producer confidence had fallen. The details were also positive with improvements in major components such as production, new orders and employment intentions. New orders rose at a quicker pace than inventories, which is positive for near-term developments.

Also positive was the Fed’s Senior Loan Officers Survey. This survey showed that US banks eased standards on commercial and industrial loans, real estate loans and on consumer loans at the start of the second quarter. The ECB’s April Bank Lending Survey showed that European banks still tightened lending standards, but by far less than in the previous survey held in January. The difference between the two surveys is of course the massive three-year loans from the ECB to the banking sector, which significantly reduced funding risks for the banks.

The Economic Sentiment Index (ESI), a good leading indicator for the eurozone, fell much more than expected in April. After having improved from December last year to March this year, in April the index fell back to the December level, which was the lowest since November 2009. The ESI fell in all three major economies of the eurozone, while the decline was steepest in Italy.

First quarter GDP data reported so far show contraction in the UK and in Spain. As the economies of both countries had already contracted in the final quarter of last year, both have technically entered a recession. As this came quite soon after the 2008/09 recession, it could count as a double dip recession.

So far, 314 of the 500 companies in the US S&P500 equity index have reported first quarter results. Almost 73% of these companies have reported better than expected earnings per share and 66% higher sales than expected. For both earnings per share and sales this is an improvement from the final quarter of last year. But these surprise ratios have deteriorated throughout the earnings season and can now no longer be called outstanding.

The earnings season in Europe is less far advanced with 82 companies in the MSCI Europe having reported their results. There are 233 companies in this index. According to data from HSBC, only 57% of the 82 companies have been able to beat earnings expectations. As earnings growth is lagging sales growth, there are some signs of downward pressure on margins.