In the euro area, the recovery is “very, very green”. This is the message conveyed by the monthly surveys and by the September PMIs. Our estimate of GDP growth in 2H 2013 is confirmed at around 0.1% q/q, although for the time…
Sign up for our free newsletter to receive weekly news from BONDWorld
Click here to register for your free copy
For professional investors and advisers only
being there are no signals of a possible acceleration at the beginning of 2014. On the banking front, the BCE-EBA banking system assessment process has been initiated: a delicate operation, not shielded from risks, considering that the burden of recapitalisation could once again come to rest on the shoulders of Member States.
No-one expected fireworks form the euro area economy in the second half of this year. Most analysts were persuaded that the 0.3% q/q growth rate recorded in the spring did not reflect the actual pace of the euro area’s economic expansion, as the unusual Easter date and the rebound in construction and retail sales after an exceptionally cold winters had inflated GDP growth. Industrial output data for July and August confirmed that the growth rate of production activity was more subdued than in 2Q 2013. The return of the PMI index above the 50-point threshold in August, and the improvement of national confidence indices, and in particular of the IFO index, certified that the low-point of the cycle was hit between May and June. However, following the recovery over the summer, confidence in the euro area failed to improve further.
In October the composite PMI was still at 51.5, while the IFO index dropped back a tad. The INSEE index of business confidence among manufacturing companies rose to 98, thus staying below its long-term average. In Belgium, sentiment actually worsened, with inventories sharply on the rise. The manufacturing PMI at 51.3 is only one point above its July level, and broken down survey data show that the foreign orders index is still at 53.0, a level compatible with rather sluggish export growth. In France, enterprises express rather cautious views on the future.
On the whole, therefore, data hitherto available confirm our estimates for an average GDP growth rate of only 0.1% q/q in 2H 2013, with no indications of an acceleration in the short term. Given this economic context, the ECB will want to maintain a markedly accommodative rhetoric, but is unlikely to add stimulus. Indeed, most statements by ECB governing council members in the last two weeks were apparently done to cool down expectations for new liquidity measures, rather than the opposite.
On 23 October, the ECB announced criteria for the comprehensive assessment of the banking system, prior to its assuming new supervisory tasks. The assessment, which will involve 128 baking groups, will begin in November and last 12 months. It will include a supervisory risk assessment, an asset quality review, and a stress test. The review is geared to “assuring all stakeholders that banks are fundamentally sound and trustworthy”; however, despite having been preceded by an intensification of the activity of national supervisors, which should reduce the margin for potential surprises, the operation is a delicate one and not shielded from risks for the euro area. The inclusion of government bonds in the assessment could penalise the refinancing activity of the weaker countries, at least until the beginning of 2014, and the lack of a central mechanism designed to directly inject capitals in banks in a subsidiary manner to the market, could rekindle tensions on sovereign debt, should the outcome of the assessment reveal the existence of high capital needs. To this end, Draghi clarified that efforts are being made at the highest level to guarantee that adequate national backstops are in place and operational during the assessment; however, these mechanisms could result in a further increase in public debt, already too high in many countries. Hopes that undercapitalised institutions (which presumably will be aware of their requirements well before October 2014) may strengthen on the market before the results are disclosed may clash with the diffidence of investors. Lastly, if the price of direct recapitalisation by the ESM starting already in 2015 were to bring forward bail-in rules, the result could be a further restraint on access to the financial markets by the banks considered to be in the weakest positions.
Appendix
Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department
Newsletter
