Europe Cash Pile Signals Savings Glut Sequel for Markets

By Simon Kennedy

Europe is becoming China without the economic growth.
What that means is that the euro area is building history’s biggest current-account surplus. The result: mountains of money likely to buoy the world’s stock and bond markets.
Deutsche Bank AG’s George Saravelos has coined a phrase for a pile he estimates has reached $400 billion: the euroglut.
“It is Europe’s huge savings glut -- what we call euroglut -- that will drive global trends for the foreseeable future,” the London-based strategist wrote in a report yesterday. “Via large demand for foreign assets, it will play a dominant role in driving global asset-price trends for the remainder of this decade.”
The cash is piling up because the world is buying European goods and services -- especially Germany’s (GRCAEU) -- and the euro area’s depressed consumers aren’t
buying much of anything from home or abroad. The region’s current-account surplus is now 2.2 percent of gross domestic product having been in a deficit of almost 2 percent as recently as 2008. In dollar terms, Deutsche Bank reckons it’s just above China’s peak last decade.
As China learned, there’s a political angle too. The surplus provides a stick for international finance chiefs to beat sclerotic Europe with during the International Monetary Fund’s annual meetings in Washington this week. The pressure will fall mainly on Germany to ramp up domestic demand given its own current-account surplus is 7 percent of GDP.

Capital Flows

Since accounting rules dictate a current-account surplus is matched by a capital-account deficit, the implications are for investors around the world. For Deutsche Bank, these include the euro falling to 95 cents against the dollar by the end of 2017 and a cap on U.S. 10-year Treasury yields even if the Federal Reserve raises interest rates. Emerging-market assets are also likely to benefit.
Think of it as a new version of what then-Fed Chairman Ben S. Bernanke called a “global savings glut” in 2005 when China’s surplus supported global asset prices.
The desire to put euros abroad will also be driven by European Central Bank measures to spur growth, such as negative interest rates, according to Michala Marcussen, Societe Generale SA’s London-based chief global economist.
“The surplus in Europe will be looking for another home in riskier markets and could seek out U.S. Treasuries,” she said in an interview. “Even once Fed starts to tighten the response may not be as aggressive at the long-end because you have this pull coming from Europe.”