Europe outshines US and UK, can the stock market boost last?

Eurozone GDP is released on Wednesday and the market is expecting a decent 0.5% quarterly growth rate for the currency bloc. If this is correct, then it would contrast sharply with a recent spate of data disappointments from the US and the UK.

Eurozone GDP is released on Wednesday and the market is expecting a decent 0.5% quarterly growth rate for the currency bloc. If this is correct, then it would contrast sharply with a recent spate of data disappointments from the US and the UK. Since the start of this year, the Eurozone’s economy has defied expectations and this is having a material impact on European stock markets. The question now is, can Europe’s growth momentum last?

Chart 1 shows the Citi economic surprise index for the US and the Eurozone. Data disappointments in the US are at their highest level since October, while the Eurozone has seen data surprise to the upside for the majority of this year. This is worth noting, as when an economy beats expectations it can have an impact on stock market performance. An economic surprise index serves as a wake-up call to investors alerting them to the economies that are doing well and which ones are lagging, this information can then be used as an input into their capital allocation decision. Thus, if economic data starts surprising to the upside, we could see a boost in stock market performance.

Economic data performance and stocks

Chart 2 shows the performance of the Dow Jones Industrial Average (as a benchmark for US) and the Dax index (as benchmark for the Eurozone). This chart has been normalised to show how they move together. As you can see, the Dax index has been outperforming the Dow Jones since the start of March, which corresponds with the economic outperformance of the Eurozone and the flurry of economic disappointments in the US economy.

So, what does this mean going forward? Here are a few of our thoughts:

  • Eurozone economic data matters for European stock market performance
  • If European data starts to underperform then we could see a major reaction in Europe’s stock markets, particularly in the Dax.
  • European indices are trading at a slightly lower P/E ratio compared to the US indices, thus, some investors’ may be choosing Europe over the US because the US is starting to look overvalued and Europe’s economy is looking strong.
  • But, economic data can’t surprise on the upside forever, at some stage the market will raise their expectations or data will start to deteriorate, thus this could be the sweet spot for European stocks.
  • Political risks may also recede in the coming weeks for the Eurozone, which could boost European stocks for a few weeks’ yet. Greece is taking concrete steps to ensure that it gets its bailout package in time for this summer’s debt repayments, and if Macron can win the second round of the French Presidential election then fears of a Frexit could be put to bed.

Chart 1: 

Chart

Source: City Index and Bloomberg 

Chart 2: 

Source: City Index and Bloomberg 


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