Euro strength rattles equity investors
LONDON: A strong euro still spooks European stock traders, even when Mario Draghi starts talking up the region’s economy.
That was the takeaway last week, when the Euro Stoxx 50 Index slid 0.9% as the currency soared to near its highest level since January 2015 after the European Central Bank president said that officials would reassess their stimulus strategy in the fourth quarter of this year.
Draghi’s remarks that the region’s economy was finally enjoying a “robust recovery” and that the central bank’s quantitative-easing programme remained unchanged for now did little to rein in the moves.
Equity investors are struggling to get used to the prospect of life without the ECB providing a floor to markets. While their reliance on the central bank for cues has eased somewhat — stocks and the euro are both up for the year — last week’s moves show Draghi’s words still hold sway. The currency gains put even more pressure on European companies to generate better earnings at home to counter the blow to exporters.
“The market was expecting dovish comments so even a neutral Draghi would inevitably push up the euro,” said Yogi Dewan, who oversees US$1 billion as the chief executive officer of UK-based Hassium Asset Management. “It added to jitters about whether we’ll get the earnings growth that everyone is hoping for.”
A profit revival after years of stagnation boosted optimism about European stocks in the first half of the year, but the rally has been losing steam since mid-May as the common currency strengthened. While that has helped the equities attract $26 billion this year, the region’s previous false starts are keeping bulls in check.
In 2015, stock funds tracking Europe attracted a whopping $123 billion from investors worldwide only to see a QE-induced rally falter throughout the year. Burned by such premature optimism, global money managers still hold 4.9% of their portfolios in cash, according to a Bank of America survey this month. That’s far higher than averages going back to 2001.
The Euro Stoxx 50 recorded its largest weekly drop in three as the euro strengthened last week. Coordinated reactions in the two asset classes to the central bank’s policy updates are rare in the era of quantitative easing: Since March 2015, the equity gauge closed higher on an ECB policy decision day only once when the currency gained as much as it did last Thursday.
With more than half of the firms on the Euro Stoxx 50 scheduled to release financial results this week, better demand should outweigh a stronger euro, according to Barclays’ William Hobbs. “The patient is leaving the emergency room,” he said.
His views diverge from strategists at Goldman Sachs, who say European profits may disappoint this season.