Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 17/02/25
Geopolitics support investors’ optimism, lifting euro area equity prices
Global equity markets edged higher in the past week (MSCI ACWI: +1.7% | +5% YtD) and continued to recover on Monday in anticipation of the Trump/Putin meeting which will focus on ending the war in Ukraine.
Euro area assets advanced further, with the Eurostoxx index overperforming and increasing by +2.9% wow in anticipation of a potential solution in Ukraine that, inter alia, could sent natural gas prices lower and business confidence higher. Bank and defense stocks led the increase, as President von der Leyen will propose to activate the escape clause for defense investments (EU defense spending €325 billion or 1.8% of GDP in 2024).
Despite the +11% year-to-date increase, euro area equity valuations do not appear stretched. In the event, the 12-month forward Price-to-Earnings ratio (P/E) stands at 14.6x versus an average of 13.1x since 2005, well within one standard deviation of average P/E (specifically, +0.6 SD), whereas the respective ratio for the S&P500 stands at 22.3x versus an average of 16.1x or marginally beyond two standard deviations. How geopolitics play out in the next weeks will be key to determine the durability of the euro area equity rally.
Euro area core government bond yields increased on a weekly basis (Bund: +5 bps to 2.42%) due to measured optimism vis-à-vis growth prospects assuming an eventual resolution of the war, as well as expectations for modest expansionary fiscal policy in Germany (elections are due on February 23rd). Periphery bond spreads remained broadly unchanged (GGBs @ 90 bps), while the EUR appreciated by +1.6% to EUR/USD 1.051.
Before the onset of geopolitical optimism, Chair Powell, reiterated during his semiannual testimony to the US Congress that after lowering the Federal Funds Rate by -100 basis points since past September, the Fed is “not in a hurry” to further ease the monetary stance. January’s CPI reinforces the aforementioned cautiousness with both the headline and the core accelerating by +0.1 pp, to +3.0% yoy & +3.3% yoy, respectively, and with the strong impetus being broad based.
Although Chair Powell refrained from directly commenting on US trade policies, risks and uncertainties related to new tariffs, changes in immigration policies, which affect, inter alia, the labor market, and potential tax and regulatory changes, were noted.
Previously, the White House had announced a significant increase in the tariffs on imports of steel and aluminum to 25%. The new rate will apply across the board country-wise and it will be effective as of March 4th.
Attention turns mostly on the US President’s pledge to impose “reciprocal tariffs” on each trading partner. President Trump refrained from announcing significant further details in the past week, ordering the development of a respective comprehensive plan to take form by April 1st, by when bilateral trade negotiations will likely take place. Notably, the US President referenced, apart from tariff rates charged on US exports, trade barriers and tax policies which weigh on US exporters, as parameters to be considered in the US’s efforts to restore “fairness” and “reciprocity”. All told, considerable uncertainty around US policy changes will continue.
Global equity markets edged higher in the past week (MSCI ACWI: +1.7% | +5% YtD) and continued to recover on Monday in anticipation of the Trump/Putin meeting which will focus on ending the war in Ukraine.
Euro area assets advanced further, with the Eurostoxx index overperforming and increasing by +2.9% wow in anticipation of a potential solution in Ukraine that, inter alia, could sent natural gas prices lower and business confidence higher. Bank and defense stocks led the increase, as President von der Leyen will propose to activate the escape clause for defense investments (EU defense spending €325 billion or 1.8% of GDP in 2024).
Despite the +11% year-to-date increase, euro area equity valuations do not appear stretched. In the event, the 12-month forward Price-to-Earnings ratio (P/E) stands at 14.6x versus an average of 13.1x since 2005, well within one standard deviation of average P/E (specifically, +0.6 SD), whereas the respective ratio for the S&P500 stands at 22.3x versus an average of 16.1x or marginally beyond two standard deviations. How geopolitics play out in the next weeks will be key to determine the durability of the euro area equity rally.
Euro area core government bond yields increased on a weekly basis (Bund: +5 bps to 2.42%) due to measured optimism vis-à-vis growth prospects assuming an eventual resolution of the war, as well as expectations for modest expansionary fiscal policy in Germany (elections are due on February 23rd). Periphery bond spreads remained broadly unchanged (GGBs @ 90 bps), while the EUR appreciated by +1.6% to EUR/USD 1.051.
Before the onset of geopolitical optimism, Chair Powell, reiterated during his semiannual testimony to the US Congress that after lowering the Federal Funds Rate by -100 basis points since past September, the Fed is “not in a hurry” to further ease the monetary stance. January’s CPI reinforces the aforementioned cautiousness with both the headline and the core accelerating by +0.1 pp, to +3.0% yoy & +3.3% yoy, respectively, and with the strong impetus being broad based.
Although Chair Powell refrained from directly commenting on US trade policies, risks and uncertainties related to new tariffs, changes in immigration policies, which affect, inter alia, the labor market, and potential tax and regulatory changes, were noted.
Previously, the White House had announced a significant increase in the tariffs on imports of steel and aluminum to 25%. The new rate will apply across the board country-wise and it will be effective as of March 4th.
Attention turns mostly on the US President’s pledge to impose “reciprocal tariffs” on each trading partner. President Trump refrained from announcing significant further details in the past week, ordering the development of a respective comprehensive plan to take form by April 1st, by when bilateral trade negotiations will likely take place. Notably, the US President referenced, apart from tariff rates charged on US exports, trade barriers and tax policies which weigh on US exporters, as parameters to be considered in the US’s efforts to restore “fairness” and “reciprocity”. All told, considerable uncertainty around US policy changes will continue.
