THE RESURRECTION OF EUROPE?

It looks increasingly as if the markets are starting to believe the narrative of lasting European growth. Stronger for longer…

European yields have been rising for days now, the German 10-year Bund going from 0.07% to 0.29% (a one-month high); the Italian 10-year bond, from a low of 1.15% to 1.51% (a two-month high); ditto Spain and the French from 0.37% to 0.57% (a one-and-half-month high). At the same time, the euro has hit a six-week high vs. the dollar. These developments are not exactly unexpected; what is surprising, however, is what has brought them about. On the one hand, inflationary pressures seem to be subsiding, and bank lending is clearly on the uptick in Europe. For the first time since 2012, it is rising year-on-year:

Source: Bloomberg.com

Source: Bloomberg.com

If European deflationary fears disappear, and it turns out we are not taking the Japanese road, then a significant price reassessment could be in the works for several asset classes, primarily bonds. Based on today’s reaction, stock investors may get scared at first (the rise in yields today has seen a simultaneous large slide on European stock markets), but overall this should be taken as good news. Europe getting back on its feet is a positive development for stocks, too.

By the way, the euro’s recovery can also be seen vs. our region’s currencies; that is the reason why the forint has been sluggish in the past few days. More than likely the most important determining factor in the next few weeks will be whether the world’s impression of Europe (which up to now can be summarized as EU = Japan, with eternal 0% interest rates and money printing for as far as the eye can see) can change, whether it becomes credible to believe that European per capita GDP can grow consistently, as has been the case in the US (pre-2008, this had happened; it was only post-recession that the regions diverged), and we do not remain in the deflationary trap. For now the signs are good. The question is how long can it last…