European stocks need a miracle to maintain edge

  • Markets
  • Saturday, 07 Sep 2019

Uncertain outlook: the euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt. The eurozone is entering a quasi-recession, writes BNP Paribas strategist Luigi Speranza.— Reuters

FRANKFURT: Over the past few weeks, European stocks have staged an unusually strong comeback versus their US peers. If the “Miracle at Medinah, ” Europe’s victory against the US in the Ryder Cup, is considered one of the best comebacks in sports history, something akin to it may be required for the European equity market’s outperformance to hold.Bear in mind that the S&P 500 didn’t drop as much as the Stoxx 600 in early August, and has beaten the European benchmark every year since 2015.

Superior earnings growth, massive share buybacks and fiscal incentives in the US are partly responsible, while European stocks have been dragged by a string of political crises and sluggish economic growth.

Still, the risk-on mood suits European markets well, as they are leading the recovery from the August fallout - even after last night’s rally on Wall Street - with investors looking to get back into cyclical stocks.

Looking at charts, the picture gives Europe the edge right now. The positive performance since last week has helped the Stoxx 600 to break out of its August range and pierce above its 50-day moving average, a positive momentum signal.

There are also some improvements in Europe. For one, Italy seems to have overcome its political issues and is showing willingness to make peace with Europe.

The FTSE MIB has now regained its leading place among main European markets with a 19% surge year-to-date, while the spread between Italian and German yields has plummeted to its lowest level since May 2018. In the UK, the risk of a no-deal Brexit next month have been receding - for now.

Still, short-term optimism might not be a big game changer.

JPMorgan strategists said earlier this week that they remain neutral on Europe, despite being “tempted” to reverse their preference for US over European stocks.

Why? Because Europe first has to beat the US in terms of earnings and European banks would need to perform better than their US peers, according to the strategists. We’re far from that, with earnings expectations still trailing in Europe. But yesterday’s big bounce in bond yields is definitely a good sign for the battered sector.

But macro data haven’t improved yet, particularly in Germany, where poor factory orders are adding to an already challenging situation. “The eurozone is entering a quasi-recession, ” writes BNP Paribas strategist Luigi Speranza, expecting a policy response from the ECB as well as from the German government through stimulus which could be worth 1% of GDP, he says.

This could end up being the key to extend Europe’s recent edge.

In the meantime, Euro Stoxx 50 futures are down 0.2% ahead of the European open, while S&P 500 contracts are up 0.1%, and the all-important US monthly jobs report is due later yesterday. — Bloomberg

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