Stimulus talk juices Eurozone markets

Eurozone stocks could be gearing up for another rally in the coming months following dovish signals from the European Central Bank.

ECB President Mario Draghi on Thursday said policymakers will decide at their December meeting whether the eurozone economy needs further easing measures. The ECB has alr eady been buying roughly US$60 billion in bonds a month since March in an effort to prop up the 19-member eurozone economy, with plans to continue the program until at least September 2016.

The eurozone economy has modestly grown so far this year, but continues to face risks in the form of low inflation and a slowing economy in China — its second largest trading partner. Draghi last month voiced concerns about the impact China will have on eurozone exports.

Analysts believe any further easing from the ECB will be great news for eurozone stocks. Eurozone markets outperformed most of their global counterparts in the months leading up to the start of the current QE program, with German stocks being big winners — the DAX rose 23 per cent from January to April.

Andrew Hunter, an economist at Capital Economics, is bullish on eurozone stocks.

He notes that eurozone equities outperformed the past few times that the euro has moved lower against the U.S. dollar, and he forecasts that will be the case in the next 12 months.

“Our view that the euro will come under renewed pressure against the dollar next year is a key reason why we think that the prospects for equities are brighter in the eurozone than in the U.S.,” he said.

The euro notably pulled back Thursday on Draghi’s comments, losing 1.6 per cent against the U.S. dollar to US$1.11. Analysts said the euro could see the kind of sharp decline it experienced prior to the launch of the ECB’s bondbuying program earlier this year.

“All of these changes to the QE should prove to be materially negative for the euro over the coming months — a re-run of early-2015 for the euro and perhaps the U.S. Dollar,” said Christopher Vecchio, currency analyst at DailyFX.

European stocks, mean- while, shot up on the news. The STOXX 600 — a collection of the eurozone’s largest companies — rose two per cent, while Germany’s DAX and France’s CAD both spiked nearly 2.2 per cent.

Eurozone stocks currently have one particular edge over their other developed-market counterparts: valuation.

“The valuations of equities in the eurozone are, both in absolute and relative terms, generally lower than those of equities in the U.S.,” Hunter said.

There are, however, some risks to keep in mind. Aside from ongoing concerns about the economic stability of the eurozone’s periphery countries, the United Kingdom could see-saw markets in the lead-up to a potential referendum on its membership in the European Union, which is expected to occur before the end of 2017.

“While some were hoping for a pickup in growth and inflation in the U.K., political uncertainty around the issue of Brexit has plunged the country into another economic no-man’s-land,” said Pierre Lapointe, head of global strategy and markets at Pavilion Global Markets.

“We see flat perspectives for the U.K. and some more weakness for the GBP in the months to come as the country gets its political and economic act together.”

The ECB will release updates for both inflation and gross domestic product in December. Draghi said the updates will help paint a clearer picture about whether a more accommodative monetary policy is needed. Deflation has been a particular concern for policymakers.

On Thursday, the 25-member Governing Council left the benchmark interest rate unchanged at 0.5 per cent, an outcome most economists had been expecting.