ECB presses pause as doves take charge

The ECB held rates steady on Thursday, which was no surprise to the market. There was virtually no chance of a rate hike, so the focus shifted to what the ECB had to say about the future of rate hikes. On this point, the ECB also did not throw up any surprises. The message can be distilled down to three main points. Firstly, inflation is still too high, although it is falling, secondly, the rate hikes of the past year and a half are weighing on inflation and thirdly, it is far too soon to be talking about rate cuts. The market impact has been fairly muted, German 10-year yields are down by 2 basis points, and the euro is the weakest currency in the G10, however, the euro index is down by a moderate 0.35% so far on Thursday.

Focus shifts to struggling European corporates

This ECB meeting has not shifted the dial for euro-based risk assets because an indefinite pause in rate hikes, which could be bullish for European stocks, is balanced out with a negative outlook for Eurozone growth. There are some bargains to be had in European stock markets, including European banks, which are languishing at valuations that suggest imminent financial disaster. While the ECB highlighted the downside risks to growth from weak manufacturing output and subdued foreign demand, today’s dovish pause from the ECB could see a loosening of financial conditions in the currency bloc. This could help consumer spending to pick up down the line, even though higher oil prices could hamper any benefit from a less hawkish ECB. Overall, while we think that some European assets are attractive from a value perspective, the current environment may be too volatile for European stocks to rally on a broad basis.

Bad news day for German stocks

There has been a spate of negative news flow from German companies. Mercedes Benz said on Thursday that its profits have been hit by a brutal price war in electric vehicles as a weaker economic outlook weighs on demand. It also forecast that 2023 profit margins will be at the lower end of prior estimates at 12-14%, due to price competition, weakening demand and a shortage of 48-volt batteries. Volkswagen also warned last week that its profit margins could come under pressure, it also announced EUR 2.5 bn of losses due to the negative effects of raw materials hedging. Bad news tends to be punished by shareholders and Mercedes Benz saw its share price fall more than 5.7% on Thursday.

Renewable energy providers in trouble

Another German company that is in trouble is Siemens Energy. It announced on Thursday that it is in talks with the German government to shore up its balance sheet after larger than forecast losses from its wind turbine business. The losses are expected to total EUR 1bn, and without government support a further EUR 110bn of clean energy projects could be in jeopardy. This is Siemens Energy’s second profit warning in four months, and some now see Siemens’ fortunes as a sign that the renewable energy asset bubble is bursting. Its share price is down 35% on Thursday, however, its financial problems suggest that the wider industry is at risk. The key thing to remember is that renewable energy companies are engineering companies as much as green tech companies. They can be beset by faulty products and cost overruns like any other engineering business. In contrast to oil and gas giants that are awash with cash, renewable businesses are often funded through loans and other forms of financing, which becomes more expensive to service when interest rates rise. Thus, cyclical, and structural issues are weighing on the sector. Plenty of people have invested in green energy and renewable solutions to boost their ESG credentials in recent years, they need to follow the fate of Siemens Energy as its future now lies with the German government and whether they will throw them a lifeline. This should be a warning to all ESG investors, to understand the risks they face when buying into renewable energy providers. It should also act as a warning to the US, where the Inflation Reduction Act is likely to pump billions of dollars into the green energy sector, which could stoke plenty of renewable bubbles on the other side of the pond.

The US economy, in a world of its own

A stellar US GDP report for Q3 was not enough to stop stocks sliding sharply on Thursday. In fairness, it could be the reason stocks came under pressure, as it makes another rate hike from the Fed more likely. The S&P 500 is down by more than 1.2%, and the Nasdaq is down by 2.11% at the time of writing. Apple is also set to close below its 200-day moving average on Thursday, which brings its declines for the past month to near 5%. Although the US consumer is strong, the threat of recession is close to the surface and that hurts a tech- consumer hybrid stock like Apple, especially due to its relatively rich valuation and the fact that it has rallied 27% YTD.

US consumer continues to deliver in a 5% world

The details of the US GDP report are worth looking at ahead of next week’s Federal Reserve meeting. Annualised Q3 GDP rose by 4.9%, higher than the 4.3% analysts expected, although it was weaker than the 5.4% predicted by the Atlanta Fed’s GDPNow model. Strong consumer spending was the main driver of GDP last quarter, with consumer spending rising at an annualised rate of 4%, up from 0.8% in Q2. Business spending was also strong. While this rate of growth is unlikely to be maintained, especially due to the large inventory build-up which helped to boost Q3 growth figures, the underlying picture for the US economy in 2023 remains strong. While stock markets were weaker, the 10-year Treasury yield fell 7 basis points as traders may prefer to wait until next week’s Fed meeting before taking a directional bet on the direction of US 10-year yields as they remain close to 5%. Fed Fund Futures were also stable, with the market still expecting the Fed to remain on hold when they meet next week. This is only the preliminary figure, and there are two further revisions of the GDP report scheduled for release in November and December. We believe that the bias could be to the upside as the US economy remains hot.