Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Stocks Are Outperforming US Peers
Transcript
- Lucas: So, if you look at the numbers from the last week, the eurozone stock ETFs have been on a tear. The Vanguard FTSE Europe ETF, that's VGK, is up 1.9 percent in five days. The iShares MSCI Eurozone, EZU, is up 3 percent. And the SPDR Euro Stoxx 50, FEZ, is up 3.5 percent. That's a pretty significant move, especially when you consider what's happening in the US. Luna: Yeah, the US market has been kind of stuck, right? The Fed's in this weird spot with inflation and growth slowing. Lucas: Exactly. And that's the backdrop. The US economy grew at just 1.5 percent in the second quarter, and core inflation is still at 3.3 percent. So the Fed is under pressure, and there's this divided FOMC. Meanwhile, the eurozone seems to be finding its footing. The euro is holding steady, the trade-weighted dollar index actually ticked down a bit, and European exporters are breathing a little easier. Luna: So what's driving this outperformance? Is it just the dollar, or is there something more structural going on? Lucas: I think it's a mix. On the currency side, the euro has been stable, which helps. But there's also this perception that European banks are better positioned now. They've been raising rates, and their net interest margins are expanding. That's a tailwind for the financial sector, which has a big weight in European indices. Lucas: And then you have the manufacturing side. Despite all the talk about trade wars and Chinese input costs, the eurozone PMI has been holding up better than expected. Spain and Italy are doing particularly well, with their ETFs up over 3 percent this week. That's a sign that the recovery is broadening beyond just Germany. Luna: Interesting. So it's not just a defensive play, it's actually growth. But what about the ECB? Are they going to keep rates on hold, or is there more room to cut? Lucas: That's the big question. The ECB has been cautious, and they're watching inflation like a hawk. But if the eurozone growth stays at this 2.1 percent pace, they might not need to cut as aggressively. That would be a positive surprise for equities. Lucas: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: Yeah, it really does. Every little bit helps keep us ad-free and independent, which is how we like it. Lucas: So, back to the markets. Another thing to watch is how the US election cycle is adding to the uncertainty. With the Fed divided and the dollar weakening, global investors are looking for alternatives, and Europe is starting to look more attractive. Luna: But is that sustainable? I mean, Europe has its own structural issues. Italy's debt, for one. Lucas: Right, but the market is focusing on the near-term earnings momentum. And right now, European companies are beating expectations. The feel is that the worst of the energy crisis is behind them, and consumer spending is holding up. So, you have this combination of better than expected growth and a more stable currency. Luna: So, for the average investor, does it make sense to tilt their portfolio toward European equities? Lucas: Well, it depends on your risk tolerance. But the data this week suggests that the risk-reward is improving. The VGK and EZU are still down from their highs, but they're gaining momentum. If you're a long-term investor, this could be a good entry point, especially if you think the Fed will keep rates higher for longer. Lucas: But I'd also caution against getting too caught up in the short-term flows. The eurozone still has its vulnerabilities, and a surprise in US inflation could reset the whole dynamic. Luna: Yeah, that's a fair point. What are you watching for in the coming weeks? Lucas: I'm watching the euro-dollar exchange rate. If the euro breaks above that key level, it could signal a bigger shift. Also, the ECB's language around their next meeting. If they sound more dovish, that could change the calculus for equities. Luna: And what about the bond market? Are we seeing any stress there? Lucas: Not really. Yields have been stable, which is a good sign. But there's always the risk of a sudden repricing if inflation surprises on the upside. Lucas: So, to sum up, the eurozone is showing surprising resilience. The combination of a stable euro, better than expected growth, and a struggling US dollar is creating a tailwind for European stocks. But it's not without risks, and the Fed's next move is still the wildcard. Luna: Well, it's definitely a market to keep an eye on. Thanks, Lucas, for breaking it down. Lucas: Always a pleasure. And remember, if you want to support the show, you know where to find us. Until next time, keep thinking about the economy.