Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Europe Is the Surprise Equity Leader of 2026
Transcript
- Lucas: So European equities are having their best week in months, and I think the market is trying to tell us something about how the global economy is being reshaped right now. Luna: The numbers are hard to ignore. The Vanguard FTSE Europe ETF, ticker V-G-K, is up 3.6 percent in just five days. The iShares MSCI Eurozone ETF, E-Z-U, up 4.5 percent. Broad-based strength. Lucas: And if walking through the economy with us has made something click — maybe it's worth the price of a coffee. Honestly, if today was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. Helps us keep this ad-free and focused on the numbers. Luna: Yeah, it does. And those listener contributions really do let us spend time on data like this rather than chasing clickbait. Lucas: So back to the rally. The SPDR Euro STOXX 50 ETF, f e z, is up 4.7 percent. Germany's e w g gained 4.1 percent. France's e w q up 3.4 percent. Italy and Spain each up 3.5 percent. Even the UK's E-W-U, which has been a laggard, is up 2.4 percent. Luna: That is remarkably broad. And it comes as US consumer sentiment hit a fresh record low last Friday, driven by iran war fueled inflation worries. You can see the rotation happening in real time. Lucas: Right. The University of Michigan sentiment number was bleak. And the trade-weighted dollar index is at 119.3 — down slightly from last week, but still very strong by historical standards. The euro is holding at 1.16. So it's not a simple 'dollar down, Europe up' story. Luna: What do you think is really driving it? The ECB has been hawkish — the Bank of France governor just said they'll 'do what is necessary' on inflation. But Eurozone growth is still anaemic. Real GDP annualised at 2 percent is not exactly booming. Lucas: I think the market is pricing two things. First, that the US economy is more vulnerable to the Iran shock than Europe is, because US consumer confidence is cratering while European consumer confidence, while low, has already been through the wringer. Second, that European equities were deeply undervalued relative to US equities. The rotation has been building for months. Luna: There's a narrative that Europe is a 'defensive' play right now because it's less exposed to the energy price spike from the Iran conflict. But is that actually true? The Putin-Xi talks on the Russian gas pipeline suggest new supply routes could emerge. Lucas: That's a good point. Europe has diversified its energy sources significantly since 2022. But the Iran war has disrupted the Strait of Hormuz, which affects global oil prices, not just European gas. So Europe isn't immune. But the market seems to be saying: the US consumer is taking the bigger hit. Luna: Let me push back a little. The US dollar is still strong. The euro is flat at 1.16. If the rally were truly about a weaker dollar, we'd see the euro rallying more. But it's not. So what's the mechanism? Lucas: I think the mechanism is relative valuation and positioning. European stocks trade at a discount to US stocks on price to earnings ratios. The gap has been historically wide. And with US earnings growth slowing, investors are rotating into markets where they see more upside. The ETF flows confirm it — European equity ETFs have seen strong inflows for the past month. Luna: So you're saying this is a genuine rotation, not just a knee-jerk reaction to bad US data? Lucas: I think it's a bit of both. The bad US data was the catalyst, but the underlying conditions for a rotation have been building. European companies are more exposed to global trade, and if the dollar weakens further, that helps their export competitiveness. But there's a risk: if the Eurozone economy slows more sharply, the earnings will disappoint. Luna: What about the ECB? They're stuck between sticky inflation and weak growth. The headline inflation may be coming down, but core services inflation is still high. If they keep rates high, that could choke off the recovery. Lucas: Exactly. And that's the tension the market is wrestling with. The rally we're seeing is partly a relief rally — Europe hasn't fallen into recession, and the energy shock from Iran hasn't been as bad as feared for the continent. But the ECB can't cut rates aggressively until inflation is clearly under control. Luna: So where does that leave the investor who wants to buy European equities now? Is it too late? Lucas: I don't think it's too late, but it's no longer a bargain-bin entry. The easy money has been made in the past week. The next leg will depend on earnings reports and whether the macro data supports the rotation. I'd be looking at sectors that benefit from a weaker dollar and a stable euro — industrials, luxury goods, and select financials. Luna: Luxury goods — that's interesting. Companies like LVMH and Hermès have huge exposure to Chinese demand. And the yuan has weakened slightly against the dollar — it's at 6.79 now. That could be a headwind for their exports to China. Lucas: True, but luxury also benefits from a weaker euro because it makes their products cheaper for US buyers. And US tourists are still spending. The bigger risk is if the Eurozone economy slips into a real downturn. Then luxury sales would suffer domestically too. Luna: Let's talk about the UK for a second. The E-W-U is up only 2.4 percent — the weakest of the bunch. The UK economy has its own issues: sticky inflation, a housing market that's still adjusting, and the new trade deal with the Gulf states is being hailed as 'monumental' but will take years to show results. Lucas: The UK is a different story. The Bank of England is also hawkish, but the UK has a larger services sector and less manufacturing export strength. So the rotation into European equities is more focused on the Eurozone core — Germany, France, Italy — than on the UK. Germany's e w g is up 4.1 percent, which is solid. Luna: And yet Germany's economy has been stagnating. The export machine is running on China risk, as we discussed in a previous episode. So the stock market rally there seems disconnected from the real economy. Lucas: That's a classic tension. Stock markets are forward-looking, and they're pricing in a recovery that hasn't happened yet. If the recovery doesn't materialise, the rally will reverse. But for now, the momentum is with Europe. Luna: So what's your single best indicator to watch over the next few weeks to see if this rally has legs? Lucas: I'd watch the trade-weighted dollar index. If it breaks below 118, that would be a strong signal that the dollar weakening trend is accelerating, which would fuel further European outperformance. Also watch the Eurozone PMIs — they're due soon. If they show expansion, the rally can continue. If they slip back into contraction, we'll see profit-taking. Luna: And the ECB meeting in June. Any hints of a rate cut would be a huge deal. Lucas: Absolutely. If the ECB signals a cut, the euro would likely fall, and that would boost European equities further — but it would also signal that growth concerns are dominating. So it's a double-edged sword. Luna: So the rally is real, but fragile. It's a bet on a specific set of outcomes: US consumer weakness, a stable Eurozone economy, and ECB patience. Lucas: Exactly. And any one of those legs could give way. But for now, the market is voting with its dollars — or euros — and Europe is winning. Luna: Alright, we'll keep watching those numbers. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to everyone listening. We'll be back tomorrow with another take on the global economy.