Forex News – Eurozone on the mend say stocks, periphery bonds- will the euro benefit?
January 8, 2014 1:21 pm
(click to enlarge)
One of the major investment themes of 2014 is expected to be increased interest in European assets. 2013 saw significant inflows into European equities as the region exited recession in the second quarter of the year. Ireland successfully exited its 3-year bailout program recently.
Looking for assets that have underperformed so far during the global bull market in equities, European and certain emerging market countries appeared to fit the bill of having underperformed and thereby having significant upside potential. In a world of zero interest rates and ample liquidity, it became apparent that investor caution about the Eurozone debt crisis had prevented bond and equity markets of the periphery to rally.
As most periphery countries are expected to post positive economic growth during 2014, the perceived risk of a flare-up of the Eurozone debt crisis has been reduced. This is mostly apparent in peripheral government bond yields, such as those of Italy.
The 10-year Italian government bond yield (yellow line, right-hand axis) has recently fallen to its lowest level since the 4th quarter of 2010 – around 3,85%. In the height of the crisis in the autumn of 2011 it was yielding almost double that at around 7.30%. The spread between the 10-year bond yields of Italy and Germany has fallen to its lowest of the last 2 ½ years. A similar story can be said of Spain, which has also seen much lower interest cost on its government bonds as worries about the country’s economic and financial situation have receded. Spanish 10-year bonds were yielding a little less than Italy’s at 3.80%.
Another positive indicator has been the performance of the region’s major stock index; the Eurostoxx 50. This index (purple line, left-hand axis) has recently scaled highs not seen since October of 2008 and has rallied more than 50% since the autumn 2011 lows when the Eurozone debt crisis woes peaked. The pre-crisis high around 4,500 is still a long way off for the Eurostoxx 50, which is currently trading around 3,100.
Whether or not the move into Eurozone equities and bonds is completely justified, is open to debate. The Eurozone is looking at best at a painfully slow recovery with high unemployment and high debt burdens. It is therefore difficult to make a compelling investment case in terms of macroeconomic fundamentals.
However, what is undisputable is that sizeable investment flows based on relative valuation and relative performance arguments, have the power to influence the euro. They could also improve tight liquidity and ease difficult market access conditions for some periphery countries. This could therefore become an important factor for foreign exchange traders dealing with the euro.
(click to enlarge)
One of the major investment themes of 2014 is expected to be increased interest in European assets. 2013 saw significant inflows into European equities as the region exited recession in the second quarter of the year. Ireland successfully exited its 3-year bailout program recently.
Looking for assets that have underperformed so far during the global bull market in equities, European and certain emerging market countries appeared to fit the bill of having underperformed and thereby having significant upside potential. In a world of zero interest rates and ample liquidity, it became apparent that investor caution about the Eurozone debt crisis had prevented bond and equity markets of the periphery to rally.
As most periphery countries are expected to post positive economic growth during 2014, the perceived risk of a flare-up of the Eurozone debt crisis has been reduced. This is mostly apparent in peripheral government bond yields, such as those of Italy.
The 10-year Italian government bond yield (yellow line, right-hand axis) has recently fallen to its lowest level since the 4th quarter of 2010 – around 3,85%. In the height of the crisis in the autumn of 2011 it was yielding almost double that at around 7.30%. The spread between the 10-year bond yields of Italy and Germany has fallen to its lowest of the last 2 ½ years. A similar story can be said of Spain, which has also seen much lower interest cost on its government bonds as worries about the country’s economic and financial situation have receded. Spanish 10-year bonds were yielding a little less than Italy’s at 3.80%.
Another positive indicator has been the performance of the region’s major stock index; the Eurostoxx 50. This index (purple line, left-hand axis) has recently scaled highs not seen since October of 2008 and has rallied more than 50% since the autumn 2011 lows when the Eurozone debt crisis woes peaked. The pre-crisis high around 4,500 is still a long way off for the Eurostoxx 50, which is currently trading around 3,100.
Whether or not the move into Eurozone equities and bonds is completely justified, is open to debate. The Eurozone is looking at best at a painfully slow recovery with high unemployment and high debt burdens. It is therefore difficult to make a compelling investment case in terms of macroeconomic fundamentals.
However, what is undisputable is that sizeable investment flows based on relative valuation and relative performance arguments, have the power to influence the euro. They could also improve tight liquidity and ease difficult market access conditions for some periphery countries. This could therefore become an important factor for foreign exchange traders dealing with the euro.
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