Europe's Investors Heartened by Robust U.S. Jobs Data
European investors took heart from the robust U.S. nonfarm payrolls data for June, which showed that 287,000 new jobs were created vs. 180,000 expected, while unemployment rose to 4.9% from 4.7%.
The main indices, which had been in the green Friday morning, shot up after the U.S. jobs data was released. Germany's DAX was up 1.8% and France's CAC-40 rose 1.3%. Even the U.K. blue-chip index, the FTSE 100, rose by 0.4%.
The robust jobs number offers hope that the U.S. economy is strong enough to pull the whole world out of the slowdown, or that it will at least lift spirits following the shock of the Brexit vote late last month. At the same time, the hope is that the Federal Reserve will refrain from hiking interest rates for longer, creating a sweet spot of strong growth but low interest rates.
Investors in Europe are very much relying on the Fed to keep interest rates low in order to help deal with the fallout from the U.K.'s vote to leave the European Union. The consequences are only beginning to show, and they are not pretty.
Earlier this week, six property funds in the U.K. suspended withdrawals, while two said they would apply deep haircuts to the share prices for those investors who do want to pull out. The pound has lost about 14% vs. the dollar since June 24 when the referendum's result was known, and that has spooked investors and British consumers alike.
A survey carried out by GfK in the week after the referendum shows that consumer confidence has plunged to more than a 20-year low. Around 60% of respondents expect the general economic situation to worsen over the next 12 months.
Outside the U.K., the rest of Europe isn't doing too well either. Germany, the eurozone's biggest country and engine, has seen its main growth driver sputter. Exports fell by 1.8% month on month in May from April -- an indication that the country's main competitive advantage, diversification to various regions and in various areas, is beginning to wear off.
Industrial production in Germany was much weaker than expected as well, falling by 1.3% month on month in May vs. expectations that it would inch up by 0.1%. The fall was driven by weakness in capital goods and consumer durables.
A weaker euro against the dollar would help keep German exports moving at a time when the eurozone is struggling with both the effects of the Brexit vote and its own political problems, such as Italy's turmoil ahead of a referendum on the structure of parliament in October.
Some analysts were hoping that the Brexit vote will trigger some form of fiscal stimulus across the rest of the EU and especially in the eurozone. However, the European Commission recommended that Spain and Portugal be punished for not taking enough measures to cut down their budget deficits.
A meeting of Finance Ministers in the European Union, set for Tuesday, will discuss what the sanctions will be and how to implement them; investors will surely watch it with interest.
One unlikely bright area has been that of emerging markets debt. Data on capital flows quoted by the Financial Times showed investors poured money into bond funds, and especially emerging market bond funds, at a fast pace, while outflows from European equities intensified.
With the Fed unlikely to raise interest rates any time soon, expect this trend to continue. Who would have thought, just half a year ago, that emerging market debt would come back in fashion so soon?
Editor's Note: This article was originally published at 9:17 a.m. EDT on Real Money on July 8.