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European Stocks Make a Strong Comeback

June 3, 2020 By Mircea Vasiu

Heading into the ECB monetary policy decision on Thursday, European stocks made a strong comeback, notably 

the IBEX in Spain up over 10% in the last few trading sessions. Based on the general aspect of the European stock market, it seems that there is something more behind the recent market rise than just enthusiasm generated by the possibility that the EU will issue joint debt.

When compared even with the United States, assets are leading now on many metrics. For a long time, flows show an incredibly weak picture for the Eurozone assets – not anymore.

US Investors Turning to International Stocks

The chart above shows the equity ETF flow into the Euro area, reflecting the US investors’ fund allocations out of the United States and into the Euro area. It reveals infant evidence that US investors started to buy international equities, including European stocks.

The USD has recently underperformed against its main counterparts, with AUD, NZD, GBP, all rising against the world’s reserve currency. Even the Euro rose from 1.08 to 1.12, despite many seeing the European economies in worse shape than that of the United States.

There are many reasons behind the moves in European equities. One may be the optimism about reopening economies, in contrast with the uncertainty that dominates many US states. Another point may come from valuations – cheaper by all metrics in Europe when compared with the US. Also, the recent riots, which have brought civil unrest at breaking point and further putting into doubt the U.S.  plans of reopening its economy.

Above all, two reasons stand out from the crowd. Firstly, the hopes for the EU Recovery Fund which has been backed by Germany and France. The states which are opposing the joint debt and the mix between cheap loans and grants to fight coronavirus will be easier to convince considering Germany and France’s strong endorsement.

Second, perhaps even more important is the highlighted uncertainty regarding the United States’ short to medium outlook. Riots and protests are one thing. But another, with bigger implications for the investment community, looms on the horizon – the US Presidential election.

Five months from now, the US Presidential election is set to take place, once again, Just like four years ago, the outcome is uncertain.

In the year Trump got elected (2016), the United States market and the USD simply consolidated, waiting for the outcome. This time, it may be that the flows out of the US reflect the fact that investors act in a proactive way to avoid months’ long consolidation ahead of the election date.