European Stocks Gain, Emerging Markets Lose Cash

Stocks in Europe rose Monday morning, while emerging markets capital losses continue in the wake of falling commodity prices and lowered growth expectations.

The rise in stocks in Europe was largely due to weak economic data, which has fueled expectations of an increased quantitative easing program from the European Central Bank. ECB President Mario Draghi has recently hinted that the central bank’s current stimulus program, which purchases over $1 trillion of bonds in public markets, may extend to encourage inflation.

Europe’s Low Growth

Stocks in Europe rose Monday morning, while emerging markets capital losses continue in the wake of falling commodity prices and lowered growth expectations.

The rise in stocks in Europe was largely due to weak economic data, which has fueled expectations of an increased quantitative easing program from the European Central Bank. ECB President Mario Draghi has recently hinted that the central bank’s current stimulus program, which purchases over $1 trillion of bonds in public markets, may extend to encourage inflation.

Europe’s Low Growth

Europe’s economic growth is weakening, with the Markit Purchasing Managers Index rising 0.4% in the third quarter, lower than expectations. The Markit September Composite PMI came in at 53.6, lower than the 53.9 expectations and at its lowest reading in four months. While that number indicates expansion, it remains an expansionary pace short of expectations and may indicate that the European Central Bank will renew its stimulative efforts.

Services are showing particular weakness, with the Markit Services PMI falling from 54.4 to 53.7, again below expectations of 54.0. Economists pay particular attention to services in the Eurozone, as it is an indicator of broad consumer demand. Several Eurozone countries saw their composite PMI reading fall, including Germany, Italy, and Spain.

The United Kingdom, which has led Eurozone in growth in recent months, also saw softness, as its PMI reading fell to 53.3 in September, the lowest reading since April 2013 and far below expectations.

Emerging Market Weakness

In addition to weak growth in Europe, emerging market GDP growth estimates fell several times throughout 2015, leading to a steady withdrawal of capital from emerging markets. According to Bloomberg data, emerging market funds based in the U.S. have seen $12 billion of redemptions in the third quarter, with outflows rising on a weekly basis across the board.

Falling commodity prices are pressuring emerging markets, which many developing economies export to developed economies. At the same time, emerging markets have seen a tremendous inflow of capital, which has also caused a rapid rise in credit. One investment bank report notes that over $8 trillion of capital has flowed into emerging markets since 2000, with over $5 trillion in annual borrowing in emerging markets, with about $3 trillion of credit coming from private banks.

That credit has largely flowed into growth-producing investments, as emerging markets have seen investment rise to over 30% of GDP, while developed markets’ investment has fallen to about 20% of GDP. The higher growth multiplier of emerging market investment has fueled investments for over a decade, but a pullback in investment suggests that market expectations of growth in emerging markets have softened, and emerging market growth expects a continued decline.