Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Eurozone Stocks Rally While the Euro Stays Flat
Transcript
- Lucas: So the eurozone stock rally is running into a very quiet wall, and that wall is the currency. In the last five days, the broad eurozone ETF, Vanguard's V-G-K, is up nearly two percent. The euro, meanwhile, is sitting at one point one five against the dollar, basically unchanged on the month. Luna: That is kind of odd. Usually when equities rip higher, the currency follows. What's holding the euro back? Lucas: Look, the market is pricing in two different stories. Stocks are cheering the idea that the ECB might actually cut rates soon, which would boost borrowing and spending. But a rate cut typically weakens the currency. And the dollar is not exactly rolling over either — the trade-weighted dollar index is still up near one hundred nineteen point seven, even after that weak jobs report. Luna: Yeah, I saw the headline — the U.S. unexpectedly lost twenty-three thousand jobs in July. That normally sends the dollar lower. Why is it holding up? Lucas: That's the puzzle. Normally you'd see the dollar soften on a miss like that, but it's barely budged. Part of it is that the eurozone has its own problems — the drought headlines are back, and those riverbeds are hurting the economy. But the bigger thing is that the market doesn't believe the Fed is going to cut as aggressively as they'd like. The dollar's yield advantage is still solid. Luna: So we've got a situation where eurozone stocks are up, but the currency is flat. Is that sustainable? Lucas: It can be, for a while. For eurozone exporters, a weaker euro is actually a tailwind. It makes their goods cheaper abroad. So you get this nice setup: stocks benefit from a soft currency, but the currency doesn't rally because the ECB is still dovish. That's what we're seeing. Luna: And the ECB — they've been stuck, right? Every meeting they hint at a cut, then hold off. Lucas: Exactly. They're worried about inflation, but they're also worried about growth. And with the U.S. jobs data coming in weak, there's pressure on the Fed to move, but they haven't. So you have two central banks both in wait and see mode, and that keeps the euro-dollar range tight. Luna: Let's talk about the numbers we're seeing. The eurozone GDP growth — real GDP growth annualized is one point five percent, down from two point one. That's a slowdown but not a collapse. Lucas: Right, and the stock market is looking through that. Equities are a leading indicator, so they're pricing in a recovery later this year or next. But the currency is stuck in the present, and the present is a eurozone economy that's still fragile. Luna: And what about the drought? I saw that headline about Europe blowing up riverbeds. That has to be a drag on growth. Lucas: It is, and it's interesting because it's not fully in the price. The Rhine is a key shipping route, and low water levels disrupt supply chains. That's a real cost. But the market seems to be treating it as temporary, even though droughts are becoming more frequent. Luna: So if the drought is a persistent issue, that could eventually weigh on earnings, right? Lucas: Absolutely. If it hits chemical companies or manufacturers that rely on river transport, you'll see it in margins. But for now, the rally is more about valuation and the expectation of a dovish ECB. Luna: So the divergence we're seeing — stocks up, euro flat — is really a bet on policy more than anything. Lucas: Exactly. The market is saying: give us lower rates, and we'll look past the weak growth. But the currency is saying: you're not getting lower rates anytime soon, because the ECB is cautious and the Fed isn't cutting either. Luna: And that's a great segue to something I wanted to mention. If today's episode is helping you make sense of these macro moves, the way we keep this show ad-free is through listener support. If you find value in these breakdowns, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, we genuinely appreciate that. It lets us keep digging into these topics without any sponsor pressure. And now — back to the divergence. What would break the euro out of this range? Luna: I was going to ask that. What would make the euro actually move? Lucas: Two things. One, if the Fed cuts more than expected, the dollar weakens and the euro rises. Two, if the ECB surprises with a hawkish tilt — maybe they signal that they're done cutting, or even hint at a hike — that would boost the euro. But right now, neither seems likely. Luna: So we're stuck with a flat euro and a rising stock market. Lucas: For now, yes. And it's actually a healthy sign for European equities because it means exporters have a tailwind. But if the euro starts strengthening while the stocks are up, that would be a signal that the market is getting more confident in the eurozone economy itself, not just the policy path. Luna: Let's talk about the ETF flows then. Are investors actually piling into eurozone funds, or is this just a short-term bounce? Lucas: Hard to say from a five-day move, but the five-day performance across the board — V-G-K, E-Z-U, f e z — all up around two percent. That's broad-based, which suggests it's not just one sector. And with the U.S. jobs report missing, there's a narrative that global investors are looking for cheaper markets, and Europe fits that bill. Luna: So it's a rotation trade. Money moving out of the U.S. into Europe. Lucas: Partly. But it's also a bet on the ECB being more aggressive than the Fed. If the Fed stays on hold, the dollar stays strong, and the euro stays weak. That's actually good for European stocks relative to U.S. stocks. Luna: And what about the bond markets? Are they telling the same story? Lucas: Yeah, look at the ten-year Treasury — it's still elevated, which supports the dollar. And in Europe, the German ten-year is lower, reflecting the expectation of rate cuts. So you have a widening spread, which typically keeps the euro under pressure. Luna: So the currency market is really just following the yield differential. Lucas: That's a big part of it. And as long as that spread persists, the euro is going to stay pinned. But if we get a surprise from the Fed — maybe they do cut in September — you could see the euro pop, and that could actually put a lid on the stock rally. Luna: Because a stronger euro would hurt exporters. Lucas: Right. So there's this delicate balance. The market is currently happy with a weak euro and strong stocks. But that might not last if the Fed changes course. Luna: So what should investors watch over the next few weeks? Lucas: I'd watch two things. First, any Fed commentary that hints at a cut — that could be a catalyst. Second, the drought situation in Europe. If it worsens, that could hit growth hard and the market might start to price that in, which would be bad for stocks. Luna: And the euro? If the dollar weakens, we could see it drift up toward one point one seven or one point one eight. Lucas: Yeah, but I wouldn't bet on a big breakout unless we get a clear policy signal. The range we're in right now — one point one three to one point one seven — that could persist for a while.