Insights: European equities in a risky spot
When Bund yields rise this quick, European equities tend to weaken: A data-based analysis.
Hello. It is good to have you here.
When this editorial was originally created, the goal was to only show news and data, and explicitly not to provide an opinion. There is tremendous work to be done in order to have a valuable opinion, even more to give valuable advice (this piece by Farnam Street is a great recommendation: The Work required to have an opinion - Charlie Munger).
This new format “Insights” will go beyond what regular “Macro Summaries” show and provide proprietary research to help you form an opinion. It is there to point out events in financial markets that might have gone under but could have a potential impact onto them.
The European market environment
News have not been positive in the recent weeks for European equity markets. Rising inflation, the Russia-Ukraine war, an energy supply shock, slowing growth, slowing business confidence and manufacturing PMI’s, no clear story from the European Central Bank and stagflation fears are going through the block. With that environment, rising borrowing costs are not the best add-on to the cocktail.
The BofA Global Fund Manager Survey supports money managers fear of weaker and weaker growth in Europe.
Looking at the data regarding timing.
Comparing the Euro STOXX 50 and the German 10 year bund yield (data provided by Bloomberg), one can observe that before every major drawdown in equities, yields rose for around 6 quarters between 1.5% - 2%.
So with regards to timing a weaker return profile in European equities, the recent rise in yield mirrors previous times, such as just before 2000 and 2008.
A tipping point could be reached soon
No one knows the future and this editorial makes no predictions, has no opinions and does not give advice. As outlined above, the current environment is not positive for European equities. And in the past, a rise in German 10 year bund yields preceded a drawdown in European equities.
This is what happened until now. It could be that a sudden turn in the environment leads to rising European equities, but the story until now says that it is time to be careful in European equity markets.