Philippe Waetcher (Natixis AM) | The low inflation observed in the euro zone will translate into very weak wage dynamics. Demand will be weak while health constraints will weigh on activity. A situation that will not make it possible to fix on medium-term prospects compatible with the recovery plans. Inflation is the answer. The government on this point has more power than the central banks.
Santander Corporate & Investment | The ECB published on Tuesday the aggregate results of its vulnerability analysis of the 86 banks directly supervised under the Single Supervisory Mechanism. This shows that “the euro area banking sector can withstand the stress induced by the pandemic but, if the situation worsens, the decline in bank capital would be significant. Furthermore, the ECB has extended its recommendation that banks should not distribute dividends until 2021.
David Kohl (Chief Economist Germany, Julius Baer) | Lower new infection rates in Europe and a swifter recovery of activity are valid reasons to scale back some pessimism regarding the eurozone growth outlook. The eurozone has ramped up its fiscal response to the corona pandemic. We feel comfortable in expecting for the region a more moderate contraction of -7.2% in 2020.
Industrial production in the euro area chalked up a record rise of 12.4% in May, after falls of 18.2% in April and 11.8% in March. However, the figure was still 20.9% below the level recorded in May 2019, according to data published by the EU’s statistics office Eurostat. In the case of Spain, industrial production rebounded 15.1% in May after declines of 22.8% in April and 13.5% in March. The figure was still 24.9% lower than in May 2019.
Yesterday, Eurostat published the Consumer Price Index (CPI) for June, which rose 0.3% year-on-year. This is a rebound in inflation in the region from the 0.1% rate recorded in May. The figures were in line with analysts’ expectations. However, even with the effect of the German VAT cut, European inflation should become negative again in July.
Ofelia Marín-Lozano (1962 Capital SICAV) | The starting point is much more solid than in 2008, when the banks emerged from many years of double-digit credit expansion and high rates. In addition, European banks have significantly improved their equity base, which is double, or even almost triple, the levels reached a decade ago in all their solvency ratios. The ratio of higher quality capital to risk-weighted assets, (CET1 or common equity tier 1) has risen from levels below 6% in 2011 to over 14% today.
Bankia Estudios | Retail sales again recorded a sharp decline in April (11.7% vs 11.1%), driven down to an all-time low. By items, the rise in online sales stands out, showing a significant increase (10.9% vs. 0.7%), pointing to a change in the pattern of consumer behaviour. This could, in part, be consolidated in the medium term, although it is too early to draw conclusions. The rest of the items recorded sharp falls, although of lesser intensity than in March.
Bankia Estudios | As expected, the improvement in the external sector observed in the first two months of the year did not continue in March. The Covid-19 crisis hit both exports and imports hard, with setbacks of more than 14% year-on-year: only trade in chemical products, mainly medicines, and food was exempt from the contraction. The Q1’20 accumulated drop in Spanish exports (3%) is similar to the one noted in the EMU (3.2%) and Germany (3.3%), but much lower than that in France (8.6%).
Patrik Lang, Head Equities (Julius Baer) | We have downgraded eurozone equities to Underweight given slower earnings recovery expectations, increasing political risk and unfavourable sector exposure. In our view, relative valuations do not fully reflect these negatives. On the other hand, we have upgraded US equities, which should benefit from a relatively fast post-Covid-19 recovery.
Asad Zangana (Schroeders) | Many economies are facing a deep recession as a result of Covid-19, but Italy went into this crisis in a more precarious situation than most. The country stands out as the most likely candidate to exit the eurozone for several reasons. First, with gross debt estimated at 135% of GDP in 2019, it faces a significant challenge in both servicing its debt, but also refinancing it.