Corporate Europe senses relief as euro falls from peak
MILAN: The recent recovery in the dollar has raised hopes that currency turbulence for European corporate will now subside, after first quarter earnings took a hit from the stronger euro.
Chemical groups Bayer on Thursday became the latest euro zone company affected by the strong euro, cutting its guidance and saying sales will likely fall in 2018.
Belgian peer Solvay and healthcare firm Fresenius also blamed adverse forex markets for their poor updates.
“You’re definitely seeing the impact of the currency headwinds in the first quarter results, and also the European economies have slowed relative to last year,” said Will Hamlyn, investment analyst at Manulife Asset Management.
The euro has been on a steady rising path since mid 2017, reaching a more than three-year high against the dollar in February and capping gains for European stock markets.
While that was seen as a sign of health of Europe’s economic recovery and signalled growing foreign investor appetite for the region’s equities, it curbed the value of overseas earnings and hurt competitiveness.
Deutsche Bank estimates that every rise in the euro reduces European earnings growth by five per cent.
Exporting heavyweights Daimler, Renault, Continental and Sanofi have all reported last month hits to their results from the strong euro.
In April however the single currency has fallen rapidly to a fourmonth low against the dollar, with the greenback buoyed by the US Treasury yields topping three per cent and expectations the Federal Reserve will further raise interest rates.
That in turn helped euro zone stocks rise 4.4 per cent in April, outperforming Wall Street for the second straight month, and shrug off slower earnings growth and weeks of disappointing data that signalled
You’re definitely seeing the impact of the currency headwinds in the first quarter results, and also the European economies have slowed relative to last year. Will Hamlyn, investment analyst at Manulife Asset Management
slowing economic growth.
“For the moment we’ve seen the headwind peak and that may stabilise this quarter,” said Pierre Bose, head of European Strategy, International Wealth Management at Credit Suisse.
“We’ve already seen a very significant amount of the euro’s appreciation take effect on earnings so at this point in time what matters most is just how much more hawkish people become on the ECB,” he added.
Bose however said markets appeared to underestimate the speed at which the European Central Bank would tighten policy, saying the euro would eventually strengthen again.
German companies listed in the broad HDAX index, whose US dollar sales exposure is estimated by DZ Bank at 28 per cent of total turnover, also rose 4 per cent last month. The US benchmark S&P 500 instead gained just 0.3 per cent.
In a note this week, Deutsche Bank strategists said they would lift their 2018 European earnings growth forecast to seven per cent from 4.5 per cent should the euro fade back to end-2017 levels.
Manulife’s Hamlyn agreed that a further fall in the euro could be welcome news for European companies, although the initial impact of the April decline was likely to be limited.
“It needs to come back down to 1.15 really to create relief for a lot of these companies,” he said.
The last time the euro traded at that level against the dollar was in July 2017.
On Thursday the euro rose off four-month lows as the dollar’s recent rally came to a halt after the US Federal Reserve did little to alter market expectations for further interest rate rises this year. — Reuters