> After a week of historic shifts in European markets, investors are declaring it may be just the beginning.Germany’s commitment to spend after a decades-long obsession with austerity spurred dramatic moves in pretty much every asset across the continent. The euro is on track for its best weekly run since 2009 and the DAX set an all-time high. Meanwhile, bond markets have plunged, with German 10-year notes set to close out the worst week since 1990. Strategists have raced to boost their forecasts for economic growth, corporate profits, federal borrowing and interest rates, while casting aside the bearish view of just weeks ago that the euro would sink to parity against the dollar. “We could be in store for a Brave New Europe,” said Madison Faller, global investment strategist at J.P. Morgan Private Bank. “A new playbook is emerging as policymakers work to define the bloc’s future on its own terms and turf.”
> All told, it was one of the most consequential weeks in years for European investors, and one that drew parallels with European Central Bank chief Mario Draghi’s “whatever it takes” posture in fighting the euro crisis. It also marked a further unwinding of the “US exceptionalism” trade, a strategy that dominated late last year, bolstering the dollar and US stocks, as President Donald Trump returned to office promising tax cuts, tariffs and low regulation. But investors have since soured on the reality of a trade war and his unpredictable approach to international relations. Now, with European leaders turning more united in their support of Ukraine and fast-tracking defense capabilities, Jim Reid, global head of macro research and thematic strategy at Deutsche Bank AG, is telling clients that he doubts “the enormity of the news has got close to being fully comprehended and digested by global investors yet.” “This is a seismic shift of the most epic proportions from Germany and perhaps only fast-money and nimble investors have responded so far,” wrote Reid.
> Strategists at UBS Investment Bank say one potential upshot is more money stays within the continent as consumers heed calls for “economic nationalism.” That would make the currency an increasingly attractive reserve to rival the dollar, they wrote in a report this week. Other investors see Germany’s decision to unlock hundreds of billions for investment as supercharging the rotation in favor of European stocks. The DAX is already up 18% this year, while the S&P 500 is in the red. The defense sector — investors’ favorite trade this year — is now up 69%. Rheinmetall AG has doubled in value. According to Citigroup Inc. strategist Beata Manthey, should spending plans go ahead, European companies will increase average profits by 11% a year through 2029. That’s faster than the 9% consensus estimate from other analysts, she said. In recent years, Europe has seen little to no profit growth. Based on investor positioning, funds are still relatively light on European stocks. In a Bank of America Corp. survey published last month, a net 12% of global investors said they were overweight European stocks. That’s up from just 1% in January. “Germany is setting in motion a significant shift in modern history, potentially transforming it from a fiscal detractor to a fiscal stimulator,” said Vasileios Gkionakis, senior economist and strategist at Aviva Investors. “Markets should take note.”
> It could all still come unstuck. Russia’s war in Ukraine is dragging on and will have lasting consequences. Chancellor-in-waiting Friedrich Merz’s plans also still need approval by two-thirds of parliament, requiring him to win the backing of the Greens, who have demands. A final vote is currently scheduled for March 18. At ABN Amro Holding NV, strategists said they also expect euro weakness to take hold again, and warned that US tariffs on automakers and drug companies may hit economic growth hard. Equity indexes reflected hints of that nervousness, with the Stoxx 600 dipping 0.2% so far this week — marking its only second negative week of the year. And with Germany’s run-up in bond yields driving up rates elsewhere, there’s the risk that other governments will be strained by steeper borrowing costs.
> But for now, investors are wagering it all on faster economic growth. The likes of Goldman Sachs Group Inc. and Mitsubishi UFJ Financial Group Inc have jettisoned bets that the euro would hit one-to-one with the dollar. Hedge funds are now buying options that the currency may hit $1.20 in six months, whereas some had previously bet on a move below $0.95. “It’s a really, really big deal for the euro,” said Peter Kinsella, global head of FX strategy at Union Bancaire Privee Ubp SA. “You’re going to see lots of funds beginning to close some of their dollar longs.” He’s sticking to his forecast of $1.10 on the euro, but said the currency might reach that mark sooner rather than later. He sees German 10-year yields topping 3% — a level hit just once since 2011, and yields across Europe moving higher.
> Past easing of European budgets have a history of backfiring. The Greece-triggered euro crisis is still fresh in the memory, while more recently the UK and France have run afoul of investors for publishing fiscal plans that failed to add up. What makes Germany different is it has long promoted austerity, making this week’s decisions all the more shocking, especially as Berlin is also lobbying for looser purse-strings at the EU-wide level. That parsimony means the nation’s debt as a percentage of its GDP is much lower than most of its peers, giving it room to be bold. “Germany has a relatively low level of public debt and they’re going to be issuing a lot,” said Kinsella at UBP. “But everybody else has high levels of debt and they’re still issuing quite a lot. So it’s going to be disruptive.”
!ping GER&EUROPE
ApprehensivePlum1420 on
Basically a Social Democrats’ dream when a Social Democrats government just lost an election lol. But yes, inflexible austerity is damaging.
neolthrowaway on
As someone who’s believed liberal democracies need a strong backup option, I have been waiting for these “European Era” headlines for a long long time.
Apprehensive-Soil-47 on
The sleeping giant is finally waking up
2017_Kia_Sportage on
Truly a sign of these dire times: the Germans are willing to spend money
5 Comments
> After a week of historic shifts in European markets, investors are declaring it may be just the beginning.Germany’s commitment to spend after a decades-long obsession with austerity spurred dramatic moves in pretty much every asset across the continent. The euro is on track for its best weekly run since 2009 and the DAX set an all-time high. Meanwhile, bond markets have plunged, with German 10-year notes set to close out the worst week since 1990. Strategists have raced to boost their forecasts for economic growth, corporate profits, federal borrowing and interest rates, while casting aside the bearish view of just weeks ago that the euro would sink to parity against the dollar. “We could be in store for a Brave New Europe,” said Madison Faller, global investment strategist at J.P. Morgan Private Bank. “A new playbook is emerging as policymakers work to define the bloc’s future on its own terms and turf.”
> All told, it was one of the most consequential weeks in years for European investors, and one that drew parallels with European Central Bank chief Mario Draghi’s “whatever it takes” posture in fighting the euro crisis. It also marked a further unwinding of the “US exceptionalism” trade, a strategy that dominated late last year, bolstering the dollar and US stocks, as President Donald Trump returned to office promising tax cuts, tariffs and low regulation. But investors have since soured on the reality of a trade war and his unpredictable approach to international relations. Now, with European leaders turning more united in their support of Ukraine and fast-tracking defense capabilities, Jim Reid, global head of macro research and thematic strategy at Deutsche Bank AG, is telling clients that he doubts “the enormity of the news has got close to being fully comprehended and digested by global investors yet.” “This is a seismic shift of the most epic proportions from Germany and perhaps only fast-money and nimble investors have responded so far,” wrote Reid.
> Strategists at UBS Investment Bank say one potential upshot is more money stays within the continent as consumers heed calls for “economic nationalism.” That would make the currency an increasingly attractive reserve to rival the dollar, they wrote in a report this week. Other investors see Germany’s decision to unlock hundreds of billions for investment as supercharging the rotation in favor of European stocks. The DAX is already up 18% this year, while the S&P 500 is in the red. The defense sector — investors’ favorite trade this year — is now up 69%. Rheinmetall AG has doubled in value. According to Citigroup Inc. strategist Beata Manthey, should spending plans go ahead, European companies will increase average profits by 11% a year through 2029. That’s faster than the 9% consensus estimate from other analysts, she said. In recent years, Europe has seen little to no profit growth. Based on investor positioning, funds are still relatively light on European stocks. In a Bank of America Corp. survey published last month, a net 12% of global investors said they were overweight European stocks. That’s up from just 1% in January. “Germany is setting in motion a significant shift in modern history, potentially transforming it from a fiscal detractor to a fiscal stimulator,” said Vasileios Gkionakis, senior economist and strategist at Aviva Investors. “Markets should take note.”
> It could all still come unstuck. Russia’s war in Ukraine is dragging on and will have lasting consequences. Chancellor-in-waiting Friedrich Merz’s plans also still need approval by two-thirds of parliament, requiring him to win the backing of the Greens, who have demands. A final vote is currently scheduled for March 18. At ABN Amro Holding NV, strategists said they also expect euro weakness to take hold again, and warned that US tariffs on automakers and drug companies may hit economic growth hard. Equity indexes reflected hints of that nervousness, with the Stoxx 600 dipping 0.2% so far this week — marking its only second negative week of the year. And with Germany’s run-up in bond yields driving up rates elsewhere, there’s the risk that other governments will be strained by steeper borrowing costs.
> But for now, investors are wagering it all on faster economic growth. The likes of Goldman Sachs Group Inc. and Mitsubishi UFJ Financial Group Inc have jettisoned bets that the euro would hit one-to-one with the dollar. Hedge funds are now buying options that the currency may hit $1.20 in six months, whereas some had previously bet on a move below $0.95. “It’s a really, really big deal for the euro,” said Peter Kinsella, global head of FX strategy at Union Bancaire Privee Ubp SA. “You’re going to see lots of funds beginning to close some of their dollar longs.” He’s sticking to his forecast of $1.10 on the euro, but said the currency might reach that mark sooner rather than later. He sees German 10-year yields topping 3% — a level hit just once since 2011, and yields across Europe moving higher.
> Past easing of European budgets have a history of backfiring. The Greece-triggered euro crisis is still fresh in the memory, while more recently the UK and France have run afoul of investors for publishing fiscal plans that failed to add up. What makes Germany different is it has long promoted austerity, making this week’s decisions all the more shocking, especially as Berlin is also lobbying for looser purse-strings at the EU-wide level. That parsimony means the nation’s debt as a percentage of its GDP is much lower than most of its peers, giving it room to be bold. “Germany has a relatively low level of public debt and they’re going to be issuing a lot,” said Kinsella at UBP. “But everybody else has high levels of debt and they’re still issuing quite a lot. So it’s going to be disruptive.”
!ping GER&EUROPE
Basically a Social Democrats’ dream when a Social Democrats government just lost an election lol. But yes, inflexible austerity is damaging.
As someone who’s believed liberal democracies need a strong backup option, I have been waiting for these “European Era” headlines for a long long time.
The sleeping giant is finally waking up
Truly a sign of these dire times: the Germans are willing to spend money