For international investors who see Europe as a highly taxed retirement home, the first half of 2017 has been a surprise. In a period of strong improvements from many equity markets, some of the best returns have come from Europe (with the MSCI Europe Index up 13.1% for the six-month period, in U.S. dollar terms). Of course, Europe has not solved all its long-standing problems, such as low growth, an aging population, high regulation and taxes and complex labor codes.
Rather, European equities have responded to the waning threat from populist politicians who, at the start of the year, had been threatening the future of the euro and who have since been pushed into retreat at the polls in Austria, the Netherlands and more recently in France. At the same time, the political backdrop in two other developed economies has deteriorated significantly. In the U.S. the Trump administration has found it difficult to implement its ideas in tax, health care and infrastructure. The outlook for the UK has also clearly dimmed as a result of the arguments about how to implement Brexit.
A few sweeteners for voters
In this new context, Europe looks like a rich, developed economic area with investment opportunities and problems not dissimilar to those elsewhere – so why should its equities trade at a discount? In a few months, the view of France has changed from a country facing insuperable problems under tired, discredited politicians to one where Emmanuel Macron, a young centrist reformer, has a strong electoral mandate for change. Implementing reform will be far from easy, but the greater the chaos in the UK, the easier it will be for Macron to push through changes – the alternative path now looks so unappealing. In an unexpected and bizarre development, disillusioned UK voters now wish they had their own Macron.
Further economic encouragement is likely to come from Germany. Preserving the current structure of the euro is hugely beneficial to German economic interests, although this is not widely acknowledged. Even though the euro has strengthened against the dollar in the past year, it still provides Germany with a much more competitive exporting currency than it would have without the euro. Hence it will find a way to support economic reforms in France and perhaps Italy too. These “bonbons” are unlikely to be offered before the German election in September but should emerge later.
Clear signals for investors?
While the view of Europe has changed sharply in the last few months, I have been arguing for some time that the best European companies are not looking at the newspapers and groaning. For many years they have been focused on their operations and opportunities; and some investors realized this well before the French election. But given the strong performance of equities in recent months, is this now the end of the party?
The signals are mixed. In the U.S. the new car market is softening, although employment growth remains robust. But in Europe several major economies such as France and Italy are only now emerging after years of near permafrost. Construction is still recovering from very low levels. There is plenty of room for activity and employment to pick up. Germany is stronger than ever. Surveys of economic confidence continue to rise. So arguably it is domestic plays on construction or other labor-intensive local services that might benefit from labor-market reform and/or infrastructure programs.
In France, infrastructure and construction group Eiffage should benefit from new government contracts to extend the motorway network and to ease congestion in cities, particularly Paris. There is also potential work from the Summer Olympics in 2024, with Paris facing Los Angeles in the final stage of the bidding process. In a different sector, contract caterer Elior would benefit from the simplification of the French labor code, which famously is longer than the Bible. More use of flexible labor contracts would boost growth and profits.
Another supporting argument has come from the first-quarter reporting season, with many European companies reporting robust profits growth (and on some surveys, stronger profit growth than in the U.S. where corporate earnings were held back by the impact of the stronger U.S. dollar).
The risk of “normalization”
But there is one cloud hanging over equities. How will the end of quantitative easing (QE) play out and how will it affect the valuation of all assets? In the last week of June, bond and equity markets took a tumble following remarks from European Central Bank (ECB) head Mario Draghi, which were taken to mean that the end of QE (central bank bond-buying) was close at hand. The yield on 10- year German government bonds (Bunds) shot up from 0.25% to 0.47% in a few days. Subsequent statements from the ECB seemed to suggest nearly the opposite. Central banks around the world are trying to find a way to normalize interest rates at a time of recovering economic activity at a time when underlying inflation and real wage growth remains low.
Clearly the U.S. central bank has taken the initiative on starting to increase interest rates. But the ECB has to tread much more warily because it does not want to snuff out what is a fragile recovery. A combination of a strengthening euro and higher borrowing costs might be hard to handle for some European economies – and the euro is already at its highest level in a year against the U.S. dollar.
Higher interest rates would likely squeeze disposable incomes. So a more realistic scenario is for the ECB to move very slowly in unwinding QE (“normalization”) and making any decision on raising interest rates. That means a relatively benign backdrop for European equities. In addition, Draghi is acutely familiar with the problems in Italy, where serious reforms have yet to start. Italy may have faded from view in recent weeks, apart from a deal to fix two of its troubled banks, but with high debts, the country cannot afford higher interest rates. Draghi is unlikely to want to be remembered as the man who brought down one of Europe’s largest economies.
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Raw Sugar (SB) surged almost 3% yesterday, completing 3 days of consolidation (just above the daily chart's downchannel resistance) and resuming a 3 week plus bounce off just below 1300. SB is firmly above downchannel resistance (on the 4hr chart) as well, and is now testing descending wedge resistance (on the weekly chart). Due to the significant gap between this wedge's support and resistance, there's a decent chance for SB to be rejected and pushed lower towards wedge support. Nevertheless, with weekly, daily and 4hr RSI, Stochastics and MACD rallying or bottomish, odds favour SB breaking above this wedge resistance. I am looking to enter long in the green zone (of the daily chart), targeting the red zone for Friday. The amber/yellow zone is where I might place a stop if I was a swing trader (although in my personal account with which I seldom hold overnight I set my stops tighter).
Raw Sugar (ICE SB Oct17) Weekly/Daily/4hr/Hourly
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Gold got a boost Friday on weaker-than-expected inflation and retail sales figures, casting doubt on the Federal Reserve’s ability to continue normalizing interest rates this year.
Consumer prices rose slightly in June, at their slowest pace so far this year. The consumer price index (CPI), released on Friday, showed the cost of living in America rising only 1.6 percent compared to the same month last year, significantly down from the most recent high of 2.8 percent in February and below the Fed’s target of 2 percent. Much of the decline was due to energy prices, which fell 1.6 percent from May.
As I’ve explained elsewhere, CPI is an important economic indicator for gold investors to track. The yellow metal has historically responded positively when inflation rises—and especially when it pushes the yield on a government bond into negative territory. Why lock your money up in a 2-year or 5-year Treasury that’s guaranteed to give you a negative yield?
But right now the gold Fear Trade is being supported by what some are calling turmoil in the Trump administration. Last week the Russia collusion story took a new twist, with emails surfacing showing that Donald Trump Jr.; Jared Kushner, the president’s son-in-law and now-senior advisor; and former Trump campaign manager Paul Manafort all agreed to meet with a Russian lawyer last summer under the pretext that she had dirt on Hillary Clinton.
Whether or not this meeting is “collusion” is not for me to say, but the optics of it certainly look bad, and it threatens to undermine the president’s agenda even more. For the first time last week, an article of impeachment was formally introduced on the House floor that accuses Trump of obstructing justice. The article is unlikely to go very far in the Republican-controlled House, but it adds further uncertainty to Trump’s ability to achieve some of his goals, including tax reform and infrastructure spending. I’ll have more to say on this later
A Contrarian View of China
A new report from CLSA shows that Asian markets and Europe were the top performers during the first six months of the year. Korea took the top spot, surging more than 25 percent, followed closely by China.
Despite persistent negative “news” about China in the mainstream media, conditions in the world’s second-largest economy are improving. Consumption is up and household income remains strong. The number of high net worth individuals (HNWIs) in China—those with at least 10 million renminbi ($1.5 million) in investable income—rose to 1.6 million last year, about nine times the number only 10 years ago. It’s estimated we could see as many as 1.87 million Chinese HNWIs by the end of 2017.
According to CLSA, global trade is robust, with emerging markets, and particularly China, driving most of the acceleration this year. In the first three months of 2017, global trade grew 4 percent compared to the same period last year, its fastest pace since 2011.
“Indeed the early months of 2017 have seen China become easily the biggest single country driver of Asian trade growth,” writes Eric Fishwick, head of economic research at CLSA.
A lot of this growth can be attributed to Beijing’s monumental One Belt, One Road infrastructure project, which I’ve highlighted many times before. But according to Alexious Lee, CLSA’s head of China industrial research, a “more nationalist America” in the first six months of the year has likely given China more leverage to assume “a larger global, and especially regional, leadership role.”
This comports with what I said back in January, in a Frank Talk titled “China Sets the Stage to Replace the U.S. as Global Trade Leader.” With President Donald Trump having already withdrawn the U.S. from the Trans-Pacific Partnership (TPP) and promising to renegotiate or tear up other trade agreements—he recently tweeted that the U.S. has “made some of the worst Trade Deals in world history”—China has emerged, amazingly, as a champion of free trade, a position of power it will likely continue to capitalize on.
The country’s overseas construction orders have continued to expand, with agreements signed since 2013 valued at more than $600 billion.
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The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price-only performance of large, actively traded shares on the Budapest Stock Exchange. The WIG20 Index is a modified capitalization-weighted index of 20 Polish stocks which are listed on the main market. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
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KEY OPINION LEADER INTERVIEW SUMMARY (PHM.MC)
Project Goal: As Phase 3 Ovarian data nears for Lurbinectedin we speak to a BRCA2 expert on the drug and its potential.
Executed on: 7/18/2017 at 10:30 am ET
Joe McCann of Slingshot Insights interviewed Dr. Pamela Munster, Co-Leader of the Center for BRCA Research at UCSF, on Tuesday July 18th. Dr. Munster has been involved in translational research and early phase clinical trials since 1998. Her basic research interest is centered on the role of epigenetic modification in therapy resistant breast cancer and epigenetic priming. This call was provided to Slingshot Insights customers free of charge by PharmaMar, a biotech company currently developing Lurbinectedin (Lurbi) for various cancers, including Breast and Ovarian Cancer.
The conversation particularly focused on the mechanism of action for lurbinectedin and the various types of genetic mutations it may be effective in treating. Lurbinectedin is currently anticipating Phase 3 results in Ovarian cancer this fall, has an ongoing Phase 3 Small Cell Lung Cancer trial, and is planning a Phase 3 Breast Cancer trial.
Highlights of Dr. Munster’s comments on the size of the market, scientific rationale for lurbinectedin, and the drug’s potential place relative to PARPS are highlighted below.
Q: At a high level as a BRCA expert, how excited about Lurbi are you?
“I've been working in the DNA double strand breaks for more than a decade. This is a drug that has a fairly decent side effect profile. It looks pretty active, so hence my excitement.”
Q: It looks in the literature like there are many more BRCA1 patients than BRCA2 in the world. Do you think this is true?
“Right now it looks like we have a lot more triple negative BRCA1 positive patients. I don't think that's really the case, I think what happens is because the BRCA1 mutated breast cancers happen a little bit later in life, patients have not been as readily tested. With more global genetic testing you will see many more patients that are BRCA2 mutated and ER positive come out and this is going to be the group of people who really need treatment.”
Q: How many patients could Lurbinectedin be a suitable treatment for on an annual basis?
“I think these numbers are, assuming roughly 200,000 patients with a new breast cancers, of which, depending on which age there is about 37% prevalence of BRCA1/BRCA2 mutations in that these numbers are probably about right. About 20,000, would get us about 10%.
Yeah, I think these numbers are right, but I think, looking at lurbinectedin as a DNA damaging agent, not as a PARP inhibitor. I think there's probably no reason to believe that someone with a chek2 mutation or a ATP mutation would not respond. That would double the patient numbers.”
Q: What side effects are most important to patients and doctors? How does Lurbinectedin’s profile look?
“I think this one (Lurbi) has a much cleaner profile. I'm looking at what PharmaMar shared with me in terms of the toxicity it looks very good. And you know, the question what bothers patients is, neutropenia is not what bothers patients. Neutropenia bothers doctors. Diarrhea bothers patients, hair loss bothers patients, so I think one has to be very clear, you can have 80% grade 3 neutropenia and no one would be bothered by that. But you have 80% leukocytes or diarrhea
that is grade 3, you won't be able to give this drug…
I think it's really important early on to be mindful that a drug with a fairly clean side effect profile can really have a lower efficacy and still be a good drug. Whereas a drug with high efficacy but a lot toxicity is still going to be a challenge”
Q: How do you think the PARP inhibitor data looks for breast cancer patients?
“...the PARP inhibitors are really good in ovarian cancer. I think the recent data with Olaparib just shows that that efficacy is just not there for breast cancer and it's certainly not there for BRCA2 mutated breast cancer.”
Q: In a world where multiple PARPs are getting approved, many investors think that leaves the space too crowded for a drug like Lurbi. Do you think that is true?
“Am I worried there's going to be too many drugs in this space? No, far from it. There may be three PARP inhibitors but they are all the same, it's like once you give them one you're not going to give the two others. You actually provide a different option which is direly needed. I'm not worried there is no room for another drug.”
About the expert: Dr. Pamela Munster of UCSF
Professor, Department of Medicine (Hematology/Oncology), UCSF; Director, Early Phase Clinical Trials Unit, Co-leader of the Center for BRCA Research, and Leader, Developmental Therapeutics Program.
Clinical research interests are first-in-human early phase clinical trials of novel compounds and alternative strategies for the treatment and prevention of cancer.
Has been involved in clinical and translational research in early phase clinical trials since 1998 with a focus on translating preclinical findings into early-stage clinical trials. Dr. Munster's basic research interest is centered on the role of epigenetic modification in therapy resistance in breast cancer and epigenetic priming.
PharmaMar’s Stock Chart vs. IBB Year To Date:
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