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KEY SIGNPOSTS
1) POLITICAL RISK SIGNALS
● CM Political Fragility Signal (Italy/Spain)● CM Policy Uncertainty Signal
(Italy/Eurozone)
2) EUROZONE MACRO RISK SIGNALS
● CM Eurozone Break-Up Gauge● CM Eurozone Convergence Signal● CM Lead Indicator Signal (Italy, France)● CM Alexandria Economic Sentiment
(Italy, core Europe)● CM Business Conditions Signal (Italy,
France)
3) EUROZONE LIQUIDITY SIGNALS
● CM CrossBorder Total Liquidity Signal (Italy/Eurozone)
● CM Credit Conditions Signal (Italy/Eurozone)
● CM Tactical Money Impulse Signal (Italy)
4) GLOBAL RISK APPETITE OUTLOOK
● CM Short Term Global Risk Appetite Matrix
● CM Medium Term Global Risk Appetite Matrix
● In our April 2018 Theme Note, “The New Eurozone Crisis”, we concluded that it was only a matter of time before Italy triggers another eurozone crisis.
● It is stuck in a debt trap.● Absent a productivity jump driven by
microeconomic reforms, Italy requires an active fiscal policy, which requires a eurozone central Treasury function, resisted by Germany.
● It will need another crisis to get one in place.
● In this update, we identify Key Signposts to monitor how the theme is developing, and to help determine our current Conviction Rating (Medium, High, or Very High).
● Although peripheral economies have made great strides to improve on a number of fundamental convergence criteria over the last few years, political risks remain high; the near term outlook for the Eurozone has deteriorated; the liquidity outlook is not supportive; and the outlook for Global Risk Appetite is negative. We maintain our Theme Conviction Level at High.
● Our Theme Basket (short Italian financial stocks and Euro High Yield against a long basket of Gold, US Treasuries, and the US$) is up 40% since it was put on in April 2018. However, relative to target, it is only 33% priced in and overall ClearENGINE tactical signals are a tailwind for continued theme performance.
Globally Integrated Asset Allocation Strategy - Integrating Strategic Investment Themes
The New Eurozone Crisis
December 2018
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Chart 1: ClearMacro Political Fragility Signal, Italy.
Chart 2: ClearMacro Policy Uncertainty Signal, Italy.
Chart 3: ClearMacro Policy Uncertainty Signal, France.
Political Risk Signals
ClearMacro’s Political Fragility Signal measures the prospect of political events having a market impact, by integrating political risk data with macro risk signals and overall asset valuation levels. The thesis is that negative market moves are more likely to occur when there is a combination of high political risk, a poor macro background, and asset prices are already very expensive (this would generate a low composite score on the ClearMacro signal). Conversely, when political risk is low, there’s a good macro environment, and asset prices are cheap (thus generating a high composite score on the ClearMacro signal), we would expect a positive market impact.
ClearMacro’s Policy Uncertainty Signal tracks the likely impact of policy-related economic uncertainty on prospective market returns, and is derived from the Baker, Bloom and Davis databases. Higher numbers indicate that policy uncertainty is very low and lower numbers that policy uncertainty is very high. Policy uncertainty across Europe has been rising over the last few months, and this is expected to be a negative driver of short-term European asset prices.
Over the next couple of months, we look forward to integrating some data points capable of providing perspective on 2 vital drivers of European political risks - namely, the pace and quality of Italian micro-economic reforms, and the impact of populist trends for European electoral prospects.
Globally Integrated Asset Allocation Strategy - Integrating Strategic Investment Themes
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Chart 4: Eurozone Break-up Gauge SIgnal.
Chart 5: Eurozone Convergence Signal.
Chart 6: Lead Indicator Signal, Eurozone.
Chart 7: Lead Indicator Signal, Italy.
Eurozone Macro Risk Signals
ClearMacro’s Eurozone Break-Up Gauge Signal measures the economic “stress” being experienced in Europe and the conditions that are likely to make the re-emergence of Eurozone break-up fears more or less likely. Higher scores represent a lower probability of break-up fears emerging based on the selected stress signals and lower scores a higher probability. Currently, Chart 4 highlights that Eurozone break-up risks are rising.
Conversely, the Eurozone Convergence Signal measures the degree of economic convergence in Euro member states by evaluating a range of fundamental convergence criteria between core and non-core Eurozone countries. Higher scores represent greater convergence and lower scores a greater divergence. Clearly, the Eurozone is in a better structural position to withstand any increased stress than in the earlier part of the decade.
ClearMacro’s Tactical Leading Indicator Signal measures the prospects for the medium-term economic outlook. Input series are used – and transformed via a 6m rate of change - that are evaluated to have predictive insight into the cyclical outlook 0-6 months in ahead. Higher scores are inferred to be more positive for the outlook and lower scores less positive (or even negative). Currently, the overall outlook in Europe is poor (chart 6), though in Italy, there are tentative signs of a bounce (chart 7).
Globally Integrated Asset Allocation Strategy - Integrating Strategic Investment Themes
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Chart 8: Business Conditions Signal, Italy.
Chart 9: Business Conditions Signal, Eurozone.
Chart 10: Alexandria Economic Sentiment, Italy.
Chart 11: Alexandria Economic Sentiment, Eurozone.
ClearMacro’s Business Conditions Signal measures the current state of business activity.
In Italy, conditions remain weak (chart 8) and likely to keep asset prices soft.
This is reinforced by the signal for the Eurozone overall (chart 9).
ClearMacro’s Alexandria Technologies Economic Sentiment Signal generates a sentiment measure about the state of the economy by scanning the language and context of 20,000 newswires in real-time. A momentum signal, a high number indicates that news sentiment is strongly positive and a lower number that it’s more negative.
This is one of our best-performing signals and highly predictive of short-term asset price returns. It bodes badly for the short-term absolute and relative price performance of both Italian and Eurozone equity returns (charts 10 and 11).
Globally Integrated Asset Allocation Strategy - Integrating Strategic Investment Themes
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Chart 12: CrossBorder Total Liquidity Signal, Italy.
Chart 13: CrossBorder Total Liquidity Signal, Eurozone.
Chart 14: Credit Conditions Signal, Italy.
Chart 15: Money Impulse Signal, Italy.
Eurozone Liquidity Signals
ClearMacro’s Liquidity Impulse Total Signal represents an aggregate index provided by CrossBorder Capital and is made up of the Public Liquidity Impulse Signal (which measures total liquidity coming from public sector sources), the Private Liquidity Impulse Signal (which measures total liquidity coming from private sector sources), and the Long-Term Market Flows Signal (total equity and bond flows in and out of an economy). It’s a good lead indicator of general economic activity and asset prices with a lead of around 6 months. Higher scores reflect stronger total economy liquidity expansion and lower scores reflect weaker or even contractionary liquidity.
Both the signal for Italy and the Eurozone (charts 12 and 13) have deteriorated sharply over the last 6 months, and this is likely to be a serious headwind for both Eurozone growth and asset prices.
The ClearMacro Credit Conditions Signal measures credit and their likely impact on asset prices. HIgher scores reflect easier credit conditions and lower scores tighter conditions. Conditions are tightening up in Italy (chart 14) as the growth rate in the ECB balance sheet falls.
The ClearMacro Money Impulse Tactical Signal measures the degree of policy liquidity impulse by measuring the medium term (6m) rate of change in M1 as a % of GDP. Higher scores reflect stronger money growth and lower scores reflect weaker money growth. After 2 years of positive trends, this signal in Italy is now entering the bearish zone (chart 15).
Globally Integrated Asset Allocation Strategy - Integrating Strategic Investment Themes
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DISCLAIMER Copyright 2018©, ClearMacro Ltd. All rights reserved. ClearMacro Ltd. is not a registered investment advisor and the general information, recommendations and other materials contained in its research and reports are for information purposes only and should not be considered as an offer or solicitation to sell or buy securities or other financial instruments or products, nor to constitute any advice or recommendation with respect to such securities or financial instruments or products. ClearMacro’s research and reports have been prepared without regard to the circumstances and objectives of those who receive it, and do not provide individually tailored investment advice. ClearMacro Ltd. does not accept any liability for what is written in its research and reports, or for any actions that occur because of the information contained in its research and reports. ClearMacro Ltd. research and reports are provided to its clients through its website [www.clearmacro.com] and are also distributed electronically. ClearMacro Ltd. relies on a variety of data providers for economic and financial market information. The data used in this report are judged to be reliable, but ClearMacro. cannot be held accountable for the accuracy of data used herein. ClearMacro Ltd., its directors, officers, employees or contractors may have some financial interest in any or related securities mentioned in its research and reports. This document is the property of ClearMacro Ltd. and should not be circulated without the express authorisation of ClearMacro Ltd. Any use of graphs, text or other material from this report by the recipient must acknowledge ClearMacro Ltd. as the source and requires express written permission.
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