Opinion

Retail giant Walmart issued another profit warning last week. And the underlying reasons point to a stagnant US economy.

Walmart pointed to a change in the spending pattern of American consumers. As a result of the continuing rise in food prices, Americans have no money left for other purchases. In order to get rid of the increasing stock, Walmart has to lower its prices considerably, which results in lower profits.

And then things moved fast. Business confidence fell to worrying levels in July, making a recession, especially in Europe, seem inevitable.

The S&P Global Flash Composite (Manufacturing + Services) PMI for Germany fell to 48.0. Well below the “magic” level of 50, seen by many as the line between economic growth and contraction - even though the actual level of negative GDP growth is considerably lower. The Manufacturing PMI also fell to 49.2.

Time and again I look for it. And every time I do not find it. What is it about? I look for the word “money growth” in interviews and speeches by board members of the European Central Bank. That is strange and revealing at the same time. 

The earnings season has only just begun, but we are already seeing some examples of what will become a trend: fewer companies beating expectations.

Investors like to be positively surprised, so companies tend to be overly cautious in their expectations so as not to disappoint those same investors. But when the economy is heading for recession, expectations are met less often and this earnings season is probably the first indication of this.

Negative surprises put a cap on the upside potential, especially for equities. As a rule, investors react strongly to surprises, often shaped as economic data. After all, the consensus expectation should already be incorporated in the prices. 

It is therefore no coincidence that there are indices that mathematically determine the degree of surprises. A good example are the Citi Economic Surprise indices. 

Problems with energy supplies, a perfect storm of geopolitical uncertainty and, in the autumn, probably another Covid flare-up… Investors in European equities are not having it easy, and yet not everything is doom and gloom.

At first glance, there is little reason to be optimistic about Europe and European equities by extension. The enormously weak euro bears witness to the malaise on the Old Continent. Optimists will argue that exporters will benefit, but then the energy supply must be secured, and it is not.

For the first time since 2002, the euro trades at parity with the dollar. In the summer of 2008, one euro was worth as much as 1.6 dollars. But with the eurozone on the front line in the war in Ukraine and the ECB simultaneously cautious about raising interest rates because of fragmentation risks, the euro seems to have only one way to go and that is down. The rapid decline of the euro is a harbinger of the next euro crisis. 

The ISM Manufacturing Index, also known as the purchasing managers’ index, fell more than expected in June. The index dropped to 53 where a reading of 54.5 was expected. This was not really a surprise, as the regional sentiment indicators had already fallen significantly. 

In fact, they pointed to an ISM Manufacturing of only just above 50.

Fifteen years ago, I bought my first iPhone in Denver, Colorado. Not entirely coincidentally, I was on holiday in the US. I did not have to queue up, but walked into the Apple store in the afternoon. The iPhones with 4 and 8 Gb flash memory were sold out, but the one with 16 Gb was still for sale.

In Luxembourg’s financial sector, ‘the new Ucits’ is an informal but widely recognised label that stands for innovation and promising change. It refers to the success of its 1980s investment legislation that offered European passports to Ucits investments funds, sparking a multi-decade boom in the financial sector, turning Luxembourg into Europe’s leading hub for investment funds and replacing the steel industry as the country’s main economic driver.