Robert Burgess

Stock Bulls Take An Unlikely Shine to Europe

The Europe index has outperformed the global market since the end of January, gaining 5.53 percent to the MSCI’s 2.86 percent increase.

The cynics would say this is solely due to the European Central Bank’s dovish turn, but that only happened last week. The outperformance of European stocks has been fairly consistent over the past six weeks. At its core, the rally seems to reflect the growing notion that Europe’s economy, which slowed before much of the rest of the world last year, may have bottomed. Italy looks to be exiting a recession, France is looking up and Spain is starting to hum. And a slew of industrial production figures over the past week or so in Europe came in better than forecast. Citigroup Inc.’s economic surprise indexes show that the degree to which euro-zone data is missing estimates is the smallest since November. That’s a huge victory, seeing as just a months ago may economists were talking about how the euro zone would lead the global economy into a recession.

“Given the low starting point for both sentiment and relative valuations, we believe even a modest incremental improvement in the European macro backdrop should be helpful for European equities’ relative performance going forward,” Bank of America strategists wrote in a research note this week. The firm said Europe saw the biggest increase in equity exposure among any region in the world at $11.8 billion, based on the positioning analysis of 4,900 funds.

The benchmark 10-year Treasury yield closed below 2.65 percent for the sixth straight day Thursday, the longest such stretch since January 2019. Also, it seems fewer people are talking about the bond market being one massive bubble, and instead getting used to idea of lower yields sticking around for longer. That can be seen in the latest yield forecasts of economists and strategists. Released Thursday, they show that yields won’t exceed the 3 percent level until the end of the third quarter of 2020. And even then, yields will only reach 3.02 percent before falling back below 3 percent the following quarter. This is a huge reversal from as recently as November, when yields were seen rising to 3.55 percent by mid-2020. And it’s important because the surge in yields above 3 percent in October and November, eventually reaching as high as about 3.25 percent, was one of the main reasons for the big sell-off in stocks in the last two months of 2018. The Federal Reserve clearly recognized this, and quickly turned dovish out of fear that a collapsing stock market might cause a marked slowdown in the economy, or even a recession. Judging by economists and strategists, it will be quite some time before rising bond yields are a threat to financial markets and the economy. One side benefit is lower home-loan rates. Freddie Mac said Thursday the average rate on a 30-year mortgage fell to 4.31 percent this week, down from last year’s high of 4.94 percent in November.

The Bloomberg British Pound Index held near its highest level since May on Thursday as U.K. Prime Minister Theresa May enjoyed a rare victory, winning the endorsement of British politicians in seeking a delay to Brexit day. The result on Thursday means her Brexit plan – which has twice been rejected by huge majorities in the House of Commons – is still in play, according to Bloomberg News’s Tim Ross. But further gains in sterling aren’t likely, based on positions in the currency market. A gauge of trader positioning from Citigroup shows short bets on the pound at their highest levels since December, according to Bloomberg News’s Ruth Carson. “The closer we get to the Brexit deadline without a clear resolution, the more nervous markets will become,” said Jingyi Pan, strategist at IG Asia Pte in Singapore. “You’re just going to see those short positions build up further.”

While sterling has recently rallied as investors latched on to the hope of a Brexit deadline extension, CIMB Bank strategist Marcus Wong is another who feels the euphoria may be short-lived. “This is merely kicking the can down the road as the U.K. is hardly closer toward signing a Brexit deal compared to three months ago,” Wong said.

Emerging-market currencies fell on Thursday, which wouldn’t be unusual except for how it’s becoming impossible to ignore their middling performance of late. After surging 5 percent between mid-September and the end of January, the MSCI EM Currency Index has dropped 1.05 percent. The recent declines would seem to throw cold water on the growing number of reports proclaiming that the worst may be over for the global economy. It’s also surprising the emerging-market currencies are struggling given the Fed’s dovish turn and reported progress in the trade talks between the U.S. and China. Both should be positive for riskier assets such as emerging-market currencies. So what’s behind the slump, and does this mean the worst isn’t over? According to the Institute of International Finance, the reasons are more benign.

It’s been a great year so far for metals, with the Bloomberg Industrial Metals Subindex up 10.4 percent. Iron ore – the key ingredient in making steel – has done even better, gaining 15 percent. Comments Thursday by the largest U.S. iron ore producer suggest that the gains are only getting started. Global output of iron ore will decline by 90 million metric tons this year as production tumbles at Vale SA – the world’s largest iron-ore producer – and some of its rivals, Cleveland-Cliffs Inc. Chief Executive Officer Lourenco Goncalves told Bloomberg News’s Joe Deaux.

The dovish tilt by major central banks in recent months is the primary reasons for the big rebound in equities, corporate credit and other risky financial assets from the selloff at the end of 2018 despite evidence of a slowing global economy.