An Early Christmas Rally for European Stocks

After over 19 months of underperformance and losses, European stocks are closing the year with a sharp upside move.

The EURO STOXX® 50 Index, the benchmark for Eurozone equities, has gained 6.8% this month through Dec. 16, beating other major regions. The move equates to a monthly advance of 11.4%, a performance not seen in any calendar month since the global financial crisis ended. The STOXX® Europe 600 Index, the pan-European benchmark, has gained 5.3% in December.

Since reaching a record on Apr. 13, 2015, the blue-chip EURO STOXX 50 lost 16% through November this year while the STOXX 600 fell 13%, with investors citing concerns related to non-performing loans in the region and the challenge of populist parties. The STOXX® USA 900 Index, by comparison, climbed 6.6% in the period while the STOXX® Global 1800 Index fell 0.4%.

Donald Trump’s presidential victory in the US and the Italian government’s defeat in a national referendum in early December have confounded earlier expectations with their effect on markets. After initial volatility, the dust settled and with both political hurdles cleared, investors turned back to a region that shows the developed world’s lowest valuations.

According to Bank of America data, European stocks are trading at 14.2 times their estimated earnings for the next 12 months. That’s the lowest ratio among six developed regions, and compares with an average multiple of 16 times for all six markets and 17 times for US equities.

The recent uptrend may help revert outflows from European shares. Investors have pulled out almost 100 billion dollars from US-based European equities funds this year, according to data from Bank of America and EPFR Global. They have withdrawn 27.5 billion dollars from US equities funds.

Whether this is a short-term rebound from oversold levels or the beginning of a more sustained turnaround remains to be seen. PULSE ONLINE will feature a 2017 outlook on European and global stocks at the start of next year.

BOJ Keeps Policy On Hold, Brightens View Of Economy

The Bank of Japan kept monetary policy steady and took a more upbeat view of the economy on Tuesday, reinforcing market expectations that its future policy direction could be an increase – not a cut – in interest rates.

Reflecting a pick-up in emerging Asian demand and factory output, the central bank upgraded its language to signal its confidence that the economy is headed for a steady recovery.

“Japan’s economy continues to recover moderately as a trend,” the BOJ said in a statement announcing the policy decision. It also offered a brighter view on exports and output to say they were picking up.

But the central bank warned the impact of U.S. monetary policy on global markets was among risks to the outlook, suggesting that the Federal Reserve’s interest rate hike cycle could disrupt emerging market capital flows.

As widely expected, the BOJ kept unchanged its pledge to guide short-term rates at minus 0.1 percent and the 10-year government bond yield around zero percent.

“The global economy recovered earlier than expected and the yen is weakening. Tailwinds are blowing, and the BOJ can stand pat for a while,” said Hiroshi Shiraishi, an economist at BNP Paribas.

Underscoring its optimism on the outlook, the central bank even revised up its view on private consumption – considered a soft spot for the Japanese economy, the world’s third largest.

“Consumption is moving on a firm note,” it said, a brighter view than last month when it said there were some weak signs.

At the previous meeting on Nov. 1, the BOJ said the economic trend was for moderate recovery, but slowing emerging market demand was weighing on exports and output.

FOCUS ON KURODA

Financial markets are focusing on what BOJ Governor Haruhiko Kuroda will say at his post-meeting news conference about the recent rise in yields.

Japanese long-term interest rates have risen in tandem with global bond yields on expectations of steady U.S. interest rate hikes and the perceived inflation-stoking policies of incoming U.S. President Donald Trump.

This has tested the BOJ’s resolve to cap the 10-year Japanese government bond (JGB) yield around its zero percent target.

That in turn has led to some market expectations the BOJ may raise its target for the 10-year JGB yield, which briefly hit 0.1 percent last week, as early as next year.