Eurozone Economy Robust Despite Equity Market Correction

Author: Bill Witherell, Ph.D., Post Date: February 14, 2018
image_pdfimage_print

Eurozone equity markets have declined in step with global markets in a widely expected market correction. While there has been some recovery in the first two days of this week, it is not yet clear that the correction has run its course. Concerns that interest rates in both the United States and Europe will rise faster than had earlier been expected appear to have been a trigger, with technical factors amplifying market swings. Following a correction in early 2016, equity markets climbed steadily, until they fell off the cliff at the end of January. The market gains in 2017 were exceptional. The US equity market gained 21.8% as measured by the SPDR S&P 500 ETF, SPY; and equity markets outside of the US gained even more, 27.8%, as measured by the iShares MSCI ACWI ex US ETF, ACWX. A correction was long overdue.

Eurozone equities peaked on January 26th in sync with the U.S. and other major markets. In most cases, however, the subsequent declines in the Eurozone were more moderate. While SPY was down 2.02% year-to-date at the end of last week, the iShares MSCI Eurozone ETF, EZU, lost 1.24%. Several Eurozone markets performed considerably better. The iShares MSCI Spain Capped ETF, EWP, declined only 0.31%; the iShares MSCI Belgium Capped ETF, EWK, still had a positive year-to-date return of 1.90%; and the iShares MSCI Italy Capped ETF, EWI, registered a 4.14% year-to-date gain. German equities, in contrast, underperformed. The iShares MSCI Germany ETF, EWG, was down 2.85%. Monday Eurozone equities followed the recovery in the US and Asia, but then fell back a bit on Tuesday. Market volatility remains high.

Fundamental factors suggest the lengthy bull market in Eurozone equities still has legs. The future prospect of higher interest rates represents the greatest risk to this outlook. The European Union has raised its growth forecast for the Eurozone economy in 2018 to 2.3%. Recent strong data for both industrial production and retail sales support this forecast. One of the best leading indicators, the HIS Markit Eurozone Composite Purchasing Managers’ Index (PMI), stood at 58.8 for January, the highest reading for this indicator since June 2006. Economic output growth was strong in all the major Eurozone economies, with France registering the strongest growth and Germany, Italy, and Ireland close behind. Business confidence is reported at an 11-month high.

The strong growth is beginning to put some pressure on prices. Input and output costs are both rising. The strong euro is likely to have a moderating effect on import prices. Nevertheless, if inflation does gather pace significantly, particularly in the second half of the year, monetary policy would then very likely become more hawkish, with the European Central Bank advancing its schedule for reducing its bond purchases and eventually raising policy interest rates. This would follow the tightening of monetary policy already well underway in the US and recently threatened by the Bank of England. At present, however, the European Central Bank continues to signal that it will maintain substantial monetary ease in the coming months, which will be a positive for Eurozone equities as long as this policy stance is maintained.  Other positives for Eurozone equities are the strong earnings momentum, easing fears of populism, and continued robust economic growth in the markets for the Eurozone’s exports.

We are maintaining our Eurozone positions in our International and Global Equity portfolios while closely monitoring inflation developments.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio

Sources: Bloomberg, CNBC, Oxford Economics, Financial Times, HIS Markit, Goldman Sachs Economic Research


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

cumber map
Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
Loading...