The stock markets have seen new developments as the year has started with Europe in the lead. The stock market in the United States has clearly been the weakest on a global level, while other markets have shown more positive development.
In the fixed income markets, Germany has lifted its foot off the debt brake. The country is making changes to the constitution that would allow for larger investments in defence and infrastructure. This has raised the interest rates on German government bonds, as the federal deficit is expected to grow.
On the foreign exchange market, the dollar has depreciated significantly against the euro in a short period of time. This is due to, among other things, the narrowing of the interest rate differential between the USA and Europe, and partly due to the turn in investor cash flows from the USA to Europe. The depreciation of the dollar has also weighed down the returns of USD investments.
Throughout the early part of the year, the stock markets in the United States and Europe have been developing in different directions. In March, however, the return difference has surged, as the United States is strongly in the negative and Europe continues to thrive. During the early part of the year, the euro zone equity market has grown by about ten per cent, while in the United States, it is about eight per cent in the negative in euros. Although the difference can be partly explained by the depreciation of the dollar, the difference is still significant.
Now, however, the stock price plunge in the U.S. equity market, which is largely due to the declining stock prices of large tech companies, seems to have stopped. The question is, however, whether this is a broader stock price decline or an internal market rotation.
If this were a broader stock price decline, it could predict a possible economic recession. On the other hand, the stock price movement could also be due to rotation, where investors are selling expensive stocks that have performed well in recent years and transferring their assets to more affordable sectors and market areas, such as Europe.
The US central bank, the Fed, held a meeting again last week, during which it kept its key interest rate unchanged. However, the Fed predicts it will be cutting its key interest rate this year, and the markets are currently pricing in two to three rate cuts for this year.
In connection with the meeting, the Fed also released its quarterly updated economic forecast, in which it lowered its economic growth expectation for this year from 2.1 per cent to 1.7 per cent. At the same time, it raised its inflation expectation to 2.8 per cent from the previous 2.5 per cent.
The previous forecasts are from December, after which a lot has happened in the markets. Tariffs and the uncertainty linked to them were the main themes mentioned by the Fed in the updated economic forecasts. The central bank emphasised that uncertainty has increased, but noted that the labour market has remained stable.
In the United States, both reported earnings and net sales continued their strong growth in the final quarter of last year. Previously, market growth relied solely on a small group of companies – mainly large tech companies – but now slightly more sources have contributed to the growth than before. However, even the most recent figures include also large individual companies lifting the entire market.
In Europe, on the other hand, growth was weaker, as expected, and earnings of reporting companies declined by roughly five per cent on average. Particularly companies that are dependent on raw materials, such as basic industry companies, and energy companies shrunk the earnings of the entire market. The figures were still relatively weak, but, at the same time, the economic situation in Europe seems to be improving.
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