This may very well be the week for a deal, or for no deal. The question is who will blink first in this dangerous game of chicken between Greece and its creditors. Global stock investors started to blink on April 13, when the EMU MSCI (in euros) hit the year’s high with a gain of 22.9% YTD. On Monday, it was down 9.4% from that peak and still up 11.3% YTD. So it continues to outperform the US, UK, and EM MSCIs. Interestingly, the latest sell-off in the EMU MSCI has been remarkably widespread among the 10 sectors comprising the index.
The good news is that the forward earnings of the EMU MSCI has been recovering nicely over the 14 weeks through June 4. In addition, the region’s Net Earnings Revisions Index jumped to 4.0% during May, the highest since September 2010. Obviously, industry analysts either aren’t counting on a Grexit, or don’t expect it will matter much to their companies. The index remains relatively cheap, with the forward P/E at 15.1.
While numerous economic indicators show that the Eurozone’s economy is on an upswing, it’s a very anemic one based on the region’s measures of industrial production. Here is the y/y performance derby for the region and its four biggest economies: Spain (2.2%), Germany (1.3), Italy (0.1), and France (-0.1). That’s not much to get excited about. It’s not much better in some of the other European economies: Sweden (1.5), UK (1.2), and the Netherlands (-4.2).
Yesterday, one of our accounts asked me if Europe’s economy is strong enough to absorb the shock of a Grexit. I think so, but I wouldn’t bet the ranch on it. Keep in mind that the Eurozone’s recovery is weak despite the fact that the following six cylinders have all been firing: near-zero interest rates, QE, a weak euro, rising bank lending, soaring stock prices, and lower oil prices.
Today's Morning Briefing: Dead Reckoning.(1) Deduced reckoning. (2) Are investors in the same boat with Nicole Kidman? (3) Is the Greek play a tragedy or comedy? (4) In praise of kicking the can down the road. (5) Angela vs. Wolfgang. (6) Earnings finally recovering in Eurozone. (7) No wind in the sails of commodity, currency, and S&P 500 traders. (8) Eurozone’s economic recovery remains uninspiring. (9) China’s economy continues to struggle with excess capacity and PPI deflation. (10) Focus on market-weight-rated S&P 500 IT industries.
