GLOBAL WEEKLY COMMENTARY

A turnaround in eurozone politics

sep 18, 2017

Key points

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

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.

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

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

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 labor 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 favorable 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.

Paragraph-3,Paragraph-4,Paragraph-5,Paragraph-6
Paragraph-2

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 at roughly 50%, up from 37% at the end of August.

  • 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.
  • U.S. 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 U.S. 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.

Global snapshot

Weekly and 12-month performance of selected assets

 

EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps 1.6% 11.7% 16.4% 2.0%
U.S. Small Caps 2.3% 6.5% 18.3% 1.2%
Non-U.S. World 0.7% 21.0% 21.6% 3.0%
Non-U.S. Developed 0.6% 19.2% 20.4% 3.2%
Japan 0.0% 12.8% 16.1% 2.1%
Emerging 1.1% 30.1% 26.8% 2.5%
Asia ex-Japan 1.2% 32.9% 26.4% 2.4%
BondsWeekYTD12 MonthsYield
U.S. Treasuries -0.7% 2.8% -0.6% 2.2%
U.S. TIPS -0.6% 2.5% 1.4% 2.3%
U.S. Investment Grade -0.4% 5.1% 3.2% 3.1%
U.S. High Yield 0.2% 6.5% 9.6% 5.5%
U.S. Municipals -0.3% 5.2% 1.5% 2.1%
Non-U.S. Developed -1.5% 10.4% 0.2% 0.8%
Emerging Market $ Bonds -0.2% 9.5% 6.6% 5.1%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil 3.4% -2.1% 19.4% $55.62
Gold -2.0% 15.0% 0.4% $1,320
Copper -2.8% 17.6% 36.1% $6,507
CurrenciesWeekYTD12 MonthsLevel
Euro/USD -0.8% 13.6% 6.2% 1.19
USD/Yen 2.8% -5.2% 8.6% 110.83
Pound/USD 3.0% 10.2% 2.7% 1.36

Source: Bloomberg. As of September 15, 2017
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective

Download now

Richard Turnill
Global Chief Investment Strategist
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock ...
Isabelle Mateos y Lago
Global Macro Strategist, BlackRock Investment Institute
Isabelle Mateos y Lago, Managing Director, is a global macro investment strategist in the Investment Strategy team of the BlackRock Investment Institute. The ...
Kate Moore
Chief Equity Strategist, Americas
Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute. She is responsible for ...
Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income. His responsibilities include working closely with the Chief ...