In Powell’s appearance before the House of Representatives on Tuesday, the Fed chairman assured that the economy “shows a sustained improvement” and that this year’s GDP is on track to record its fastest rate of increase in decades. How are investors on Wall Street interpreting this? Did they already take it for granted?
We were working with an expectation of growth for this year of 6.5%. What we have had is an update half a point above, up to 7% in rates year on year. Basically, what we are seeing in the PMIs, both services and industrial, shows that the situation is very good. They have made a small update on the growth side and a big update on the inflation side.
In the US they are already beginning to talk about ‘tapering’ but Lagarde has made it clear that Europe is in a different situation. Would a delay in tapering in the Eurozone benefit the European stock markets?
On paper, yes. What happens is that Europe has been doing worse than the US for decades. Anything that is helpful from the monetary and fiscal point of view favors the good performance of the market, because basically what is estimated is that with a greater monetary and fiscal stimulus, what there will be is greater profits of the companies that justify higher multiples on the stock market and that, therefore, investors want to pay increasingly higher prices. The problem is that stocks have not reflected corporate profits for a long time. They reflect the optimism that comes from the phrases of promises of future encouragement. The situation in Europe shows that we are one notch below the US. We do not have such strong growth, although a significant rebound is expected during the second part of this year, to end 2021 at around 4.6%, compared to 7% in the US, but we do not have the problem of inflation either. In the US the general is at 5%, the underlying at 3.8%. On the European side, we have headline inflation at 2% and core inflation at 1%, therefore, one percentage point below what the ECB would like. They are two very different realities. We grow less and we have less inflation pressure and that perfectly justifies that the ECB is sending messages that it is very prompt to withdraw monetary stimuli because we do not even have the main magnitude, which is measured by Lagarde, core inflation, it is not in the planned objective and we are still coming out of the recession. The US and Europe are going through two very different circumstances. There is a lag of probably nine months. For the beginning of next year we are comparing equivalent situations. To this day, the ECB’s message makes all the sense in the world
Will the dollar continue to be the king of currencies once the Fed turns off the tap?
The only thing the dollar has done is reflect some common sense in the last move it has made. We have started the year with most investors, both institutional and retail obsessed with a weak dollar. Everyone was very negative on the dollar, but the reality is that the differential between the German and the American bonds did not justify those Eurodollar valuations. Growth rates between the US and Europe did not justify a stronger euro. And the difference in inflation rates does not justify a stronger Eurodollar either. Therefore, when we were at 1.22 we already said that it did not make much sense. The Eurodollar I think should trade lower. We will probably see attacks to the 1.17 zone and even 1.16 during the next few weeks.
Bankinter analysts think that the Ibex 35 is the index with the least upward potential. What do you think about it? Is there a chance right now?
A curious circumstance is taking place on the Ibex 35. What was the engine of the rise in the index a few months ago, which were renewables and electricity, have become the great ballast. In return, those who were the great burdens, the banking sector, have become the engines of the recovery of the Ibex. I believe that renewables and utilities continue, at least some of them, such as Solaria or Iberdrola, having very solid bullish structures in the medium and long term. These corrections must be used to buy.
On the contrary, in banks the structural trend is downward. There is a feeling that banks have returned, but the reality is that the macro environment does not favor banks. There are people who say that inflation will force central banks to raise interest rates, but what Lagarde says is the opposite. That a euro so strong bothers him, that it is not going to withdraw stimulus, that there will not be rate hikes probably until 2023 and we are in the middle of 2021. We are putting in price many things that may not even happen. In the same way that the US has begun to talk about tapering, the elimination of some existing stimuli from the monetary point of view that can justify whether or not there is more steepening in the curve that favors the bank, that is a separate discussion In Europe, it seems very difficult for that to happen, because we neither have an inflation problem nor is there any sign from the ECB that monetary policy is going to change in the next two years. A zero rate environment without curve steepening is a very difficult environment for banking. From that point of view, I think that what we are going to experience is that the Ibex 35 is going to be left without the driving force over the next few months, which until now is banking. Perhaps the recovery will come from sectors that performed well at the end of last year, but are not doing well at all, such as defensive utilities.