The Global Markets Weekly – 6/29/18

Posted July 2, 2018 by rvillareal

Enough Priced In for Soggy Europe and EM Equities?

U.S. equities’ outperformance has been stark over the last two months viewed against emerging markets and Europe, although admittedly not out of line with outperformance seen from 2010 through 2015 on an MSCI ex-US comparison. 2016 and 2017 saw a pause as Eurozone growth impoved on a relative basis—everything surged—but tax cuts and renewed growth divergence this year has widened the gap. Estimates for U.S. economic growth are higher over the last three to six months, the only major economy or region where that’s true. While earnings growth expectations for Europe’s Stoxx 600 in the low double-digit range are nothing to scoff at, they’re less meaty than the 20-25% y/y pace expected in the U.S. for the remainder of 2018.

This abundance of good news in the U.S. coupled with highly visible strains abroad may now have investors asking whether and when markets will have fairly priced in those relative trends and newsflow. As EU leaders concluded their summit Friday, it’s evident that tensions on the key issue of migrants headed into the region remain acute, but brushstrokes of a deal on external borders might kick the can further down the road. Whether that staves off a breakdown of the fragile German ruling coalition, in turn keeping Merkel’s future at the core of the Eurozone safer remains to be seen. Beyond that, forging a common budget or crisis backstop will take years.

Taken together, these trailing developments validate recent pressure ex-U.S. assets, but tell less about a turning point. Combined with persistent tailwinds in the U.S. that augur continued gradual Fed tightening, the attractiveness of emerging markets would also seem questionable. However looking ahead, if views of trade-spats-as-negotiating-strategy prove valid, stepping back into Europe and politically stabler emerging markets including China may be warranted. Waiting until the July 6^th U.S.-China tariff deadline may prove prudent to avoid catching the proverbial falling knife, but the balance of risks bears watching.

Coming Week’s Key Indicators and Events

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