As the U.S. markets start off Friday's trading with a yawn, things are much more interesting here in Europe. The stock markets over here have traded lower Friday, but not by a substantial margin. It seems as if the complacency that has gripped the U.S. markets of late has crossed the Atlantic.
The news overnight here was certainly not bullish with China's GDP reported at 6.0%, the lowest quarterly reading in 27 years. My friends in the economics community here and in NYC are united in the belief that China's official government figures overstate the actual rate of growth in the Middle Kingdom by a percentage point or two. So, there was almost no chance that the Chinese government figures would come in below 6%, but I guess the September quarter registered at 6.000001% or something like that.
With car sales in China down again in September, the 15th decline in the past 16 months, the palpable weakness in China's industrial sector is seeping into the consumer sector. Watch for the People's Bank of China to loosen the reins on monetary policy, but, someday, some way, the world's central bankers are going to realize that coordinated policy actions just aren't working any more. Ten years of flooding the system with money has certainly lessened the marginal impact of each additional loosening of the spigot.
Also, this morning Renault issued a profit warning. I followed the Euro car industry for many years as a sell-side analyst, and Renault is a very reliable indicator of the state of the European economy. Renault hasn't sold cars in the U.S. for decades and has never made headway in China. Without penetration in the world's two largest car markets, Renault's success is driven by the health of the European consumer. With 2019 revenues now expected to decline and a lower margin forecast, all signs point to yet another round of discounting among the Euro carmakers. It is a brutal business, to be sure.
Also this morning the Bank of Italy noted "stagnant" growth for Italy's GDP in 3Q2019. The consensus forecast for Italian economic growth in 2019 is trending toward 0.0%.
Still the biggest issue facing Europe is Brexit. I am writing this column only a couple miles from the Houses of Parliament in which tomorrow's crucial Brexit vote will occur. Both The Sun and The Daily Mail featured banner headlines this morning politely suggesting that MPs vote for Boris Johnson's "good new deal." Can BoJo convince ideologically-friendly colleagues to vote for this deal after rejecting Brexit three times earlier this year?
(See Jim Collins on How to Trade Brexit, here.)
That cohort even includes Boris' brother, Jo, who voted against his brother's previous proposal. As the Beatles sang "Get Back, JoJo!"
It's fun to watch, but it is all just lipstick on the proverbial pig. Europe's economy has ground to a halt. The prevalence of negative-yielding bonds in today's markets means there is no way investors can earn adequate returns to finance that stagnation. So, watch for disintermediation among the large Euro banks, especially the French, who have particular exposure to China's debt bubble.
As always, there is an ETF to play that scenario. In this case, it is (EVIX) , a security that tracks the volatility of the STOXX50, an analog to the S&P 500's VIX index. EVIX is not terribly liquid, and hasn't performed well the past two weeks, but I am glad to hold it given the poor state of the tea leaves for Europe's macroeconomy. I am buying more into this week's rally, as well.