Europe equities are among the hottest things now


The outperformance of the region’s stocks has been fairly consistent over the past six weeks
Chief Investment Office15 Mar 2019
Photo credit: AFP Photo


US

US stocks halted a three-day rally Thursday (14 March), while the dollar surged amid concern a trade deal with China remains elusive.

The S&P 500 Index spent most of the session fluctuating between gains and losses in thin trading, before a slight fade at the close. News that a meeting to end the trade war with China would not happen this month weighed on sentiment. The index had jumped 2.5% in the prior three days, pushing past the 2,800 level that had capped prior advances. Consumer and material shares were the worst performers Thursday. Bank and technology shares led gains.

Investors have a lot to grapple with just now. US stocks had gained for three straight days this week (ending 14 March) as economic data came in neither too hot nor too cold, while traders in Europe on Thursday seemed to be shrugging off more warning signs from the region – perhaps because of hopes Brexit can be delayed or derailed. Figures suggesting China’s slowdown deepened in the first two months of the year added to reasons for caution following this quarter’s rebound in Asian shares. – Bloomberg News.

The S&P 500 slipped 0.09% to 2,808.48 and the Nasdaq Composite Index fell 0.16% to 7,630.91, but the Dow Jones Industrial Average crept 0.03% higher to 25,709.94.

 

EUROPE

The Eurozone’s largest economy is faltering and its political situation is as unsettled as ever, and yet Europe equities are among the hottest things in financial markets.

Consider Thursday (14 March), when the Stoxx Europe 600 Index jumped 0.78% to 378.52 as the MSCI All-Country World Index was little changed. That is not just a one-hit wonder: the Europe index has outperformed the global market since the end of January, gaining 5.53% to the MSCI’s 2.86% increase.

The cynics would say this is solely due to the European Central Bank’s (ECB) dovish turn, but that only happened last week. The outperformance of Europe stocks has been fairly consistent over the past six weeks.

At its core, the rally seems to reflect the growing notion that Europe’s economy, which slowed before much of the rest of the world last year, may have bottomed. Italy looks to be exiting a recession, France is looking up, and Spain is starting to hum. And a slew of industrial production figures over the past week or so in Europe came in better than forecast. Citigroup Inc’s economic surprise indices show that the degree to which Eurozone data is missing estimates is the smallest since November. That is a huge victory, seeing as just a months ago may economists were talking about how the Eurozone would lead the global economy into a recession.

“Given the low starting point for both sentiment and relative valuations, we believe even a modest incremental improvement in the European macro backdrop should be helpful for Europe equities’ relative performance going forward,” some strategists said. Europe saw the biggest increase in equity exposure among any region in the world at USD11.8b, based on the positioning analysis of 4,900 funds, they said.

On Thursday, Europe equities reached their highest level in five months in a broad-based rally led by energy and telecom stocks as the UK seems on course to delay Brexit, while comments from the ECB boosted Italian banking shares. – Bloomberg News.

 

JAPAN

Toyota Motor Corporation, leery of US President Donald Trump’s threats to raise tariffs on cars and auto parts, is adding about USD3b to a years-long US investment plan announced just before the “America first” president took office.

The added spending raises the amount Toyota is investing in the US to almost USD13b over a five-year period ending in 2021. This includes a new USD750m outlay across several plants, the most noteworthy being for retooling a factory in Kentucky to build gas-electric versions of the top-selling RAV4 crossover and Lexus ES sedan.

Japan’s largest automaker has tried to work its way into Trump’s good graces after being a target of his tweets when he was still president-elect in January 2017. Days after drawing criticism for plans to build Corolla cars in Mexico, Toyota announced a USD10b, five-year investment plan. In August of that year, it unveiled plans with Mazda Motor Corporation to jointly build a USD1.6b factory in Alabama.

Jim Lentz, chief executive officer of Toyota North America, said the decision to further amp up the investment reflects Toyota’s credo to build cars where they are sold, as well as increasing US demand for its vehicles. But he also said a new North American trade deal and tariff threats also contributed to the moves.

“I’d be disingenuous if I said we didn’t have an eye on trade,” he said.

Trump congratulated Toyota by tweet about 80 minutes after the company’s announcement on Thursday (14 March) and linked the investment to the US-Mexico-Canada Agreement, or USMCA, the still unratified deal intended to replace North American Free Trade Agreement.

Toyota’s announcement comes a week after General Motors Company shut the first of four plants it is closing in the country over the next year as it jettisons slow-selling sedans. Ford Motor Company also is eliminating thousands of jobs amid an USD11b restructuring. – Bloomberg News.

The Nikkei 225 Index was 0.59% higher at 21,414.66 in early-Friday (15 March) trading. It endured a topsy-turvy session on Thursday to finish little changed at 21,287.02.

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