Weekly house view | Europe makes its move

Weekly house view | Europe makes its move

The CIO's view of the week ahead.

The week in review

European equities outperformed their US peers last week, with the Stoxx Europe 600[i] rising 3.3% (in euros) compared to a 1.9% (in USD) rise in the S&P500[ii]. Europe’s outperformance was helped by stronger-than-expected earnings in the first quarter. In the bond market, US 10-year Treasuries and German 10-year yields were barely changed on the week. Sweden’s central bank cut rates for the first time in eight years, acting ahead of the euro area in an effort to support its recession-hit economy. The Bank of England held rates but flagged a potential cut this summer. In Tokyo, Governor Kazuo Ueda said the Bank of Japan may take monetary policy action if yen falls affect prices significantly.

Geopolitics

China’s President Xi Jinping gave few concessions and chafed some relations during a visit to Europe last week. In a further sign of “deglobalisation”, President Joe Biden’s administration is expected to raise tariffs on Chinese EV imports this week – a move that could pre-empt similar potential action by Donald Trump, Biden’s rival this year for the presidency.

Key data

US banks reported weaker loan demand in the first quarter of the year, a Federal Reserve survey of senior loan officers showed, indicating that US monetary policy is still restrictive. The survey pointed to tighter credit conditions for corporations, which should lead to higher default rates among high yield issuers. A separate University of Michigan survey showed US consumer sentiment fell a six-month low in May as households worried about the cost of living and unemployment. UK first quarter GDP surprised on the upside, showing growth of 0.6%, as the economy exited recession. In the euro area, business activity expanded at its fastest pace in almost a year in April, with growth in services more than compensating for a downturn in manufacturing. In China, aggregate financing, a broad measure of credit, fell by RMB199 bn on the month in April – a concerning contraction in financing activity. Consumer prices rose 0.3% on the year in April, the third rise in a row.

[i] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, STOXX Europe 600 (net 12- month return in EUR): 2019, 27.6%; 2020, -1.5%; 2021, 25.5%; 2022, -10.1%; 2023, 16.5%.
[ii] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, S&P 500 Composite (net 12- month return in USD): 2019, 31.5%; 2020, 18.4%; 2021, 28.7%; 2022, -18.1%; 2023, 26.3%.
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