What Energy Crisis?

The streak of good economic news coming out of Europe continued last week. First, the latest PMI readings showed business activity in the region expanding at the fastest pace in nine months. Second, European benchmark natural gas prices fell to an 18-month low. But despite good economic news, Wall Street strategists are not overly optimistic about the region’s stocks, forecasting that they will end the year down 2% from today’s levels. They are optimistic about Chinese stocks, however, with the driver of the potential gains likely rotating from expanding valuation multiples to earnings growth, according to Goldman Sachs. Finally, Coinbase released its latest earnings last week, with the firm reporting a three-quarter drop in trading volumes and revenue. Find out more in this week’s review.

Macro

Let’s start off with Europe: new data last week showed business activity in the region rose in February at the fastest rate in nine months. The eurozone composite PMI, a measure of business activity across the manufacturing and services sectors, rose to 52.3 from 50.3 in January. That was significantly higher than the 50.7 expected by economists. It also marked the second consecutive month above the 50 level, which signifies expanding business activity.

That better-than-expected data suggests that the eurozone economy may avoid a contraction in the first quarter of this year. And that will only strengthen the European Central Bank’s resolve to continue raising interest rates to bring down inflation, which has remained stubbornly high in the bloc. The ECB lifted rates by 50 basis points this month and said it would hike by a similar amount in March. But traders are betting that the central bank will eventually take rates to all-time highs. In fact, markets are pricing in a jump in the ECB’s deposit rate to 3.75% by September – up from the current 2.5%. That would match the benchmark’s 2001 peak, when the ECB was still trying to shore up the value of the newly launched euro.

Stocks

Strategists at Goldman Sachs are bullish on China, expecting the selloff in the country’s stocks since late January to reverse as the nation’s economic reopening delivers windfall profits for businesses. The investment bank sees potential for the MSCI China Index to reach 85 points by the end of 2023 – an increase of about 24% from today’s levels.

The bullish forecast comes as investors debate whether the reopening-fueled China stock rally that began in November has run its course. But according to Goldman, the main theme fueling China’s stock market will gradually shift from reopening to recovery, with the driver of the potential gains likely rotating from expanding valuation multiples to earnings growth. This growth is expected to be heavily tilted towards the consumer economy, where the services sector is still operating significantly below 2019’s pre-pandemic levels.

But while Wall Street is bullish on Chinese stocks, the same definitely cannot be said about European ones. After gains of more than 9%, the Stoxx Europe 600 index will end 2023 at 455 points, according to the average target in a Bloomberg survey of 16 investment bank strategists. That implies a roughly 2% drop from today’s levels.

Europe’s ability to so far avoid an economic recession, optimism around China’s reopening, and surprisingly robust corporate earnings have all helped send the region’s stocks higher. But the strategists expect a loss in momentum over the coming months as the full impact of higher interest rates materializes, while earnings estimates – which have started rising again after four months of cuts – get downgraded.

Commodities

Sticking to Europe for a bit longer, the bloc’s energy crisis seems to be a thing of the past. Last week, natural gas prices in the eurozone fell to an 18-month low. More specifically, benchmark Dutch TTF gas prices fell below €50 per megawatt hour – its lowest level since the build-up to Russia’s invasion of Ukraine – as traders grow increasingly confident that European countries will avoid shortages this winter and next.

Helped by mild weather, ample storage, efforts to curb consumption, and strong inflows of liquefied natural gas from the US to Qatar, European gas prices have tumbled by more than 80% from their August 2022 peak, when big cuts in Russian supplies led to alarm about possible blackouts. Back then, the gas benchmark peaked at more than €300 per megawatt hour, hitting Europe with about $1 trillion in energy costs, hammering the region’s economy, and pushing inflation to the highest in decades.

Crypto

Coinbase released its latest earnings last week, with the crypto exchange reporting that trading volumes on its platform plummeted by 73% in the fourth quarter compared to the same time last year. No surprise then that the firm’s revenue, which is closely tied to trading volumes, collapsed by 76%. That’s why diversifying revenue streams away from just trading fees has been a big priority for Coinbase. The firm has made good progress on that front, with subscription and services revenue growing 33% last quarter from a year ago and, at $283 million, accounted for almost half of Coinbase’s revenue in the fourth quarter. The company expects subscription and services revenue for the current quarter to be between $300 million and $325 million.

Reflecting back on 2022, Coinbase said last year was a tough one for the crypto sector, with overall crypto market capitalization declining alongside the broader stock market. What’s more, these weakening market conditions were further exacerbated by two idiosyncratic events. The first was the de-pegging of stablecoin TerraUSD (UST) and the subsequent collapse of Terra’s native token, LUNA. The events, which occurred in the second quarter of 2022, contributed to a roughly 60% crypto market cap decline in the quarter and exposed poor risk management practices in the sector. The second event was the collapse of FTX last quarter, which was the result of fraud, and helped drive multiple credit-related bankruptcies across the sector.

This week

• Monday: Eurozone economic sentiment (February), US durable goods orders (January). Earnings: Zoom Communications.
• Tuesday: Japanese retail sales (January), French and Spanish CPI (February), US consumer confidence (February), US Case-Shiller home price index (December). Earnings: Rivian Automotive, Virgin Galactic.
• Wednesday: Chinese manufacturing PMI (February), German retail sales (January) and unemployment rate (February) and CPI (February). Earnings: Salesforce, Snowflake, NIO.
• Thursday: Eurozone CPI (February) and retail sales (January). Earnings: Zscaler.
• Friday: Japanese CPI (February) and unemployment rate (January), Chinese services PMI (February).