The paths of the USA and Europe seem to have diverged once again in terms of economic growth, interest rate cut expectations and the development of stock and fixed income markets.
In November, the US stock market gained momentum from the elections, and the global stock market also rose at the beginning of the month, driven by the US. In Europe and the emerging markets, however, performance was poor.
In the USA, interest rates also surged in anticipation of the new government’s policies. The rise has since levelled, but the trend is still upwards. The movement in risk premiums was relatively small. Interest rates in Europe have taken a downward turn.
The appreciation of the dollar against other currencies has accelerated. The exchange rate between the euro and the dollar is currently at its lowest level in almost two years.
In Europe, the economic outlook has been muted for a long time – especially compared to the United States. The European PMIs published last week were extremely weak, and more gloom seems to be in store for Europe in the future as well. The markets are currently waiting for further data on, for example, inflation figures and the labour market situation.
As far as Europe is concerned, both the PMIs and economists’ GDP estimates point to a challenging outlook. Purchasing manager figures from France in particular have been very weak.
At the same time, the growth outlook in the United States has strengthened as concerns about the weakening of the labour market have decreased. More information on the subject is expected on Finland’s Independence Day, when the next US labour market report will be published. The PMIs have also been on upward trajectory – in contrast to the downward trend in Europe.
At the same time, expectations regarding the interest rate policies of the US and European central banks – the Fed and the ECB – have diverged even more strongly. While the ECB is expected to lower its key interest rate five times before next summer, the Fed is expected to cut interest rates at a slower pace.
The market sentiment has calmed down since the US elections held in early November, which at times raised the market to euphoric highs. The outlook for the near future is strong, but the market has priced in a lot of upside already at this stage.
Rotation, which was strong in July and August, has also re-emerged. Rotation picked up after the elections but has since calmed down. In recent days, the strongest performers have also been found outside the large caps and the inveterate winners. Rotation themes seem to have a lot of room for an increase provided that the mood remains strong.
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