PKB's Market Espresso
June 27, 2024

Data, data and more data

In Europe PMI’s fell indicating that the rebound in euro-area private activity unexpectedly lost momentum – manufacturing recorded worst month of the year

• European composite PMI fell to 50.8 in June (vs. 52.5 expected) 
• Manufacturing continues to struggle (manufact. PMI 45.6 vs. 47.9 expected), services are keeping Eurozone afloat – German industry is weak spot 
• Weaker than expected figures encourage bets on new cuts from ECB 
• On Friday in the US we will have the notorious PCE deflator for May – expected to come out stable, further indicating that inflation is moderating
• On Friday we will also have the preliminary inflation figures for France, Spain and Italy, which are expected to be largely unchanged from the previous survey

The SNB does it again

• Rates were cut for a second time in a row, to 1.25% • The decision was a close call, with analysts split
• The SNB has two parameters: 
• Inflation, ideally in the range 1-2% 
• The strength of the Swiss Franc 
• May CPI Inflation was a comforting 1.4% 
• The Swiss franc had weakened after the ECB’s “hawkish cut”…
• …but recovered its haven status in the aftermath of the snap elections called by President Macron of France

Seven years in seven days

• Seven days will decide the legacy of President  Macron’s seven years at the helm 
• The two-round elections will take place on June 30th and July 7th
• A disgruntled electorate will have three choices:
  ➢ Melenchon’s Nouveau Front Populaire on the left
  ➢ Macron’s Ensemble in the centre
  ➢ Le Pen’s Rassemblement National on the right

• The French electoral system make predictions almost  impossible 
• Of the three scenarios –left, right, hung parliament the hung parliament looks most likely and most  worrisome
• French and –to a lesser extent- Eurozone bond and  equity markets took notice…

• Bill Clinton’s chief strategist warning during the 1992  election will resonate in France 
• The right promises to reduce VAT on energy and fuel and  to lower the retirement age 
• The left has promised “tax-and-spend” to increase public  sectors wages and minimum pensions 
• Macron’s campaign has focused on the dramatic impact  these promises would have on the budget 
• And, France’s credit rating was lowered from AA to AA- on  May 31st by rating agency Standard & Poor’s 
• Yet a small IPSOS poll found that 25% of respondents put  more trust in the right to manage the economy 
• However, 62% also said the right’s program was not credible 
• On the economy, the left came second at 22%, the President’s party third at 20%

Fund Manager Survey: very bullish

Bank of America's latest Fund Manager Survey signals considerable optimism among investment professionals. Most recently, they have increased equities from the eurozone and reduced positions in materials and energy stocks.

• Recession ? 73% think there will not be one. 
• Hard landing, soft landing or no landing ? 64% of respondents expect a soft landing: a mild slowdown in growth and inflation. No landing comes second at 26%, hard landing is distant at third.

• Positioning: the majority of investors indicate a significant overweight in equities. The equity allocation decreased slightly to an overweight of 39%, which puts the current allocation above its long-term average. The average cash ratio in portfolios is 4%, which is the lowest level since June 2021. Historically, this is a low figure and reflects a significant degree of confidence among fund managers.

Critical battery materials

Graphite anode active material (AAM), cathode precursor (PCAM) and class 1 nickel on the way to become bottlenecks to eligible E-Mobility under critical mineral requirement proposed guidance on the New Clean Vehicle Credit (CVC) in the US.

• Graphite is the main bottleneck – this should ease into 2028, but in the same year class 1 nickel will constrain eligible vehicles. The upcoming supply bottlenecks could cap clean vehicles from 2025. 
• With 94% and 84% of global graphite AAM and PCAM supply in China respectively, these two materials present the largest bottlenecks to critical minerals within the requirement qualification (CVC). 
• AAM production cost outside China is at least 2x China levels due to higher land, energy, emissions and labour costs.
• Bad news for European OEMs operating in the US, they are least prepared as they rely predominantly on Chinese materials supply.