This from BlackRock on Europe, analysts at the firm say they are underweight European equities, citing the energy shock’s toll on growth that will weigh on risk assets. Add that they see market pricing of rate hikes as still too hawkish.
Further detail:
The war in Europe ... The conflict is likely to be protracted as both sides expand aims, accelerating the rewiring of global ties in a fragmenting world.
Europe has borne the brunt of the energy and commodity surge after the invasion. We see a clearer risk of recession as the energy crunch hits real, or inflation-adjusted, incomes.
The European Central Bank (ECB) looks on the brink of a potential policy misstep – insisting that growth can hold up to justify higher rates. We think the ECB will realize its mistake sooner than the Fed. The euro area should feel the economic shock earlier and has a lower starting point of growth than the U.S. The ECB already tried to offset its own hawkishness with an emergency meeting on its “antifragmentation” tool that aims to contain rising borrowing costs in weak economies. The catalyst? The spread on 10-year Italian bonds is approaching previous stress points, as the chart shows.
It’s not all bad, though.
We should not underestimate the strengthened unity of Europe in the face of Russia’s aggression. Europe has the opportunity to create a more sustainable and more resilient version of itself – replacing high dependencies on Russian energy and shedding the image of an “old” economy by accelerating the green transition. Rising rates aren’t bad for everyone either – euro area bank stocks could get a boost from interest income as rates finally resurface from negative territory.
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EUR update, EUR/USD rocketed after the FOMC and has held onto gains through Aisa trade:
