Euro area equities have recorded double-digit gains year-to-date defying elevated trade uncertainty
European equity indices have overperformed their US peers (+11% year-to-date versus -4% for the S&P500) due to (i) expectations for stronger economic growth and corporate profitability (expansionary fiscal policy in Germany and enhanced defense spending in the EU-level) and (ii) lower equity risk premia amid the increased likelihood for a ceasefire in Ukraine. Investors will focus on talks between Trump and Putin on Tuesday.
In absolute terms, the equity rally has moderated (+0.6% month-to-date vs -5% for the S&P500) as the valuation expansion has been rapid, with the DAX40 price to earnings ratio hovering at multi-year highs of 15.1x from 13.5x in early January (see graph below) and economic (i.e. tariff) policy uncertainty remains. On Tuesday, the Bundestag will vote on fiscal reforms.
Greek equities have overperformed their European peers, so far in March (+5.3% month-to-date) with bank stocks leading the increase (+12% month-to-date and +30% year-to-date). Price action was buoyant in the past week ahead of Moody’s decision.
The rating agency eventually upgraded by one notch the Government of Greece's issuer credit rating, to Baa3 from Ba1, with a stable outlook. Prior to that action, Moody’s was the only major rating agency assigning a sub-investment grade to Greece.
The revision came on the back of a greater resilience of the sovereign credit profile to potential future shocks, in view of public finances improving faster than previously expected, as well as a resilient banking sector. The public debt-to-GDP ratio (153% in 2024) is estimated by Moody’s to decline by 15 pps by end-2026.
The prospect of debt-financed infrastructure and defense spending, as well as the probability of higher potential real GDP growth has prompted a significant increase in German Bund yields, with the 10-Year up by 47 bps to 2.88% month-to-date and the 10/2 term spread widening significantly to circa 70 bps (bear steepening). Euro area sovereign bond spreads have remained broadly unchanged, so far, with the GGB-Bund spread narrowing slightly by 3 bps to 80 bps).
10-Year US Treasury yields have been in a range month-to-date (4.2% to 4.3%) as higher inflation expectations have been offset by weaker-than-expected business and consumer survey data. According to the University of Michigan consumer survey, sentiment deteriorated sharply for a 3rd consecutive month in March, with the respective index at 57.9 (74.0 in December 2024 and 20-year average of 79.9). Respondents’ inflation expectations in the 1-year ahead horizon surged to +4.9% (+2.8% in December). Actual retail sales for February, released on Monday 17th, came out below expectations (+0.2% mom and +3.1% yoy), albeit the details were more encouraging.
Major central banks are likely to stand pat in the current week in view, inter alia, of elevated policy uncertainty, especially regarding international trade (Bank of Japan, Bank of England).
The Federal Reserve (March 19th) is also anticipated to maintain the FFR rate at the range of 4.25% - 4.50%. Attention will turn to the meeting statement and the press conference, combined with the quarterly economic projections and the assumptions for the policy rate (in December 2024, the median assumption pointed to a range of 3.75% - 4.00% by end-2025).
European equity indices have overperformed their US peers (+11% year-to-date versus -4% for the S&P500) due to (i) expectations for stronger economic growth and corporate profitability (expansionary fiscal policy in Germany and enhanced defense spending in the EU-level) and (ii) lower equity risk premia amid the increased likelihood for a ceasefire in Ukraine. Investors will focus on talks between Trump and Putin on Tuesday.
In absolute terms, the equity rally has moderated (+0.6% month-to-date vs -5% for the S&P500) as the valuation expansion has been rapid, with the DAX40 price to earnings ratio hovering at multi-year highs of 15.1x from 13.5x in early January (see graph below) and economic (i.e. tariff) policy uncertainty remains. On Tuesday, the Bundestag will vote on fiscal reforms.
Greek equities have overperformed their European peers, so far in March (+5.3% month-to-date) with bank stocks leading the increase (+12% month-to-date and +30% year-to-date). Price action was buoyant in the past week ahead of Moody’s decision.
The rating agency eventually upgraded by one notch the Government of Greece's issuer credit rating, to Baa3 from Ba1, with a stable outlook. Prior to that action, Moody’s was the only major rating agency assigning a sub-investment grade to Greece.
The revision came on the back of a greater resilience of the sovereign credit profile to potential future shocks, in view of public finances improving faster than previously expected, as well as a resilient banking sector. The public debt-to-GDP ratio (153% in 2024) is estimated by Moody’s to decline by 15 pps by end-2026.
The prospect of debt-financed infrastructure and defense spending, as well as the probability of higher potential real GDP growth has prompted a significant increase in German Bund yields, with the 10-Year up by 47 bps to 2.88% month-to-date and the 10/2 term spread widening significantly to circa 70 bps (bear steepening). Euro area sovereign bond spreads have remained broadly unchanged, so far, with the GGB-Bund spread narrowing slightly by 3 bps to 80 bps).
10-Year US Treasury yields have been in a range month-to-date (4.2% to 4.3%) as higher inflation expectations have been offset by weaker-than-expected business and consumer survey data. According to the University of Michigan consumer survey, sentiment deteriorated sharply for a 3rd consecutive month in March, with the respective index at 57.9 (74.0 in December 2024 and 20-year average of 79.9). Respondents’ inflation expectations in the 1-year ahead horizon surged to +4.9% (+2.8% in December). Actual retail sales for February, released on Monday 17th, came out below expectations (+0.2% mom and +3.1% yoy), albeit the details were more encouraging.
Major central banks are likely to stand pat in the current week in view, inter alia, of elevated policy uncertainty, especially regarding international trade (Bank of Japan, Bank of England).
The Federal Reserve (March 19th) is also anticipated to maintain the FFR rate at the range of 4.25% - 4.50%. Attention will turn to the meeting statement and the press conference, combined with the quarterly economic projections and the assumptions for the policy rate (in December 2024, the median assumption pointed to a range of 3.75% - 4.00% by end-2025).
