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A turnaround in eurozone politics

18-Sep-2017
By BlackRock Investment Institute, Richard Turnill

Key points

  1. We see a steadier eurozone political environment helping support growth and reform momentum – and bolstering the case for the region’s equities.
  2. Global stocks hit new highs, government bond yields rose and the US dollar rallied. Hurricane Irma’s impact was less severe than feared.
  3. The Federal Reserve this week is expected to announce its plan to start gradually winding down its balance sheet in October.

A turnaround in eurozone politics

Eurozone politics have entered a period of calm. Long-term challenges such as slow growth, integration of immigrants and decreased competitiveness remain. Yet a steadier political backdrop supports sustained, above-trend economic growth and some reform – and bolsters the case for investing in the region’s equities, in our view.

Chart of the week
Eurozone growth outlook and support for the euro,2010-2017

Chart of the week

Sources: BlackRock Investment Institute and European Commission, September 2017.
Notes: The eurozone growth outlook is represented by the BlackRock GPS. It shows where the 12-month consensus GDP forecast may stand in three months' time for a GDP-weighted average of Germany, France, Italy and Spain. Support for the euro is represented by the percentage of respondents within the eurozone in favor of the euro, based on the European Commission's Eurobarometer survey from May 2017. Draghi’s “Whatever it takes” speech refers to comments from European Central Bank President Mario Draghi that the central bank would do “whatever it takes to preserve the euro” in July 2012. Brexit vote refers to the UK referendum on the country's European Union membership on June 23, 2016. Emmanuel Macron won the French presidential election on May 7, 2017.

Confidence about the future is on the rise in Europe. Popular support for the euro single currency has risen to its highest since 2004, as the blue line in the chart shows. Our BlackRock GPS (green line) shows consensus forecasts for economic growth in Germany, France, Italy and Spain – the four largest eurozone economies – are near their 2015 peak.

Anti-Europe threat fades

The potential for extremist politics to become mainstream has faded in recent months, we believe, and prospects for reforms look brighter than they have in years. In Italy, the likelihood of an anti-euro government has dwindled, as no major party is pushing to exit the eurozone. In France, President Emmanuel Macron is expected to implement his largely pro-growth agenda with the help of a solid majority in parliament. His labour market reforms are off to a good start, with a batch of reforms expected to be enacted shortly without major protests. Angela Merkel was widely expected to win a fourth term as German Chancellor on Sunday. The key unknown is whether her coalition partner will be the pro-European Social Democrats (SPD) or the pro-business Free Democratic Party (FDP), which has a more reluctant stance on European integration. Overall, there is a pro-reform wind blowing in Brussels and key European capitals.

The risks? Economic growth dampens the urgency to reform, and differing views on which reforms are needed are too large to overcome. Italian elections in the spring are likely to cause political and financial turbulence along the way, and eventually produce a hung parliament. We see this limiting the scope for the reforms and fiscal adjustment that Italy needs to keep its large debt sustainable.

Bottom line: A largely benign European political backdrop looks to be setting the stage for a favourable investment environment in the near term. This adds to sustained above-trend growth and ongoing monetary accommodation. A much stronger euro is another risk. This would be a threat to corporate earnings and export growth, and could complicate the European Central Bank’s efforts to reach its inflation target. We prefer European equities to credit in this environment.

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  • Global stocks hit new highs, government bond yields rose and the dollar rallied. Hurricane Irma caused considerable devastation but the damage was less severe than many had feared.
  • US core inflation picked up in August. Hawkish comments from the Bank of England reflect six-year-high inflation and the lowest unemployment rate since 1975. The British pound rose to a one-year high against the US dollar.
  • Base metal prices fell to multi-week lows, pressured by a stronger dollar. Oil rose on the improved demand outlook from the International Energy Agency and the Organization of the Petroleum Exporting Countries (OPEC). Lower OPEC output in August also helped.

 


Date: Event
Sept. 19-20 Federal Open Market Committee (FOMC) meeting
Sept. 21 Eurozone flash consumer confidence indicator; Bank of Japan monetary policy meeting
Sept. 22 U.S., eurozone, Germany and France composite purchasing managers’ index (PMI)
Sept. 24 German federal election

The Fed is expected to announce its plan to start gradually winding down its balance sheet in October. Investors do not anticipate a rate increase at this meeting, but see the odds of a December rate increase rise to roughly 50%, from 37% at the end of August.

Richard Turnill
Managing Director, ist Global Chief Investment Strategist von BlackRock
Richard Turnill ist Global Chief Investment Strategist von BlackRock. Davor war er Chief Investment Strategist von BlackRocks Fixed Income und active Equities ...

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