Pan-European stocks are up by 55% since March, and could gain another 20%-25% over the next 12-18 months, says Citigroup. The region is on just 1.5 times book value and earnings should rise by 20% next year. But “watch out”, says Carl Weinberg of High Frequency Economics – investors have become far too optimistic about Europe’s economic recovery.
The banking system remains broken and a “wave” of further losses on loans lies ahead, says Deutsche Bank’s Joseph Ackermann. The IMF estimates that only 40% of the banks’ likely losses have been revealed. Europe’s relatively high exposure to the global economy through exports means growth has fallen sharply – it will slide by around 5% this year in Germany – and now the strong euro is taking its toll, says Ian Campbell on Breakingviews.
German exports to the non-euro area were down an annual 26.4% between January and August. The euro is also exacerbating the impact of deflationary housing busts in Ireland and Spain. “The eurozone’s pain is going to go on.”
The big picture: metals will fall back to earth
Base metals have rocketed this year, but the rally has stalled in the past two months, says Chris Flood in the FT. This chart helps explain why. Industrial metal inventories in warehouses monitored by the London Metal Exchange have climbed to a record 5.6 million tonnes, and while supplies are high, there is so far no evidence of Western demand coming through to compensate for an end to Chinese stockpiling. The risk of a correction is growing as metals “have overshot fundamentally justified levels”, says Eliane Tanner of Credit Suisse.
Gold watch
Further dollar weakness has propelled gold to a new record above $1,060 an ounce, while solid demand for gold jewellery in India, the largest gold buyer as the wedding season begins, is also bolstering sentiment. After its strong run-up, gold looks vulnerable to a short-term correction. However, with major currencies looking unappealing and jitters over future inflation mounting amid central bank money printing, the bull run is far from over. Deutsche Bank reckons prices will average $1,150 next year.