Wed. Oct 27th, 2021

European equities updates

European equities had their longest winning streak in eight years, as corporate earnings fell sharply from last year’s recession caused by the pandemic and central banks continued with monetary stimulus in economies around the world.

The Stoxx 600 European equities index rose 2 percent in August, leading to the seventh consecutive months of gains and the longest monthly increases since the end of the 2012-2013 financial crisis.

Businesses on the Stoxx reported second-quarter total net income growth of 249 percent from the same time last year, when the shutdown of coronavirus propelled the eurozone economy to its sharpest contraction.

According to data provider FactSet, the percentage of European companies exceeding analysts’ earnings estimates peaked at five years in the second quarter.

European equities were also strengthened by the European Central Bank, which has promised to keep benchmark rates at historically low levels until inflation remains ‘sustainable’ above its 2 per cent target. Like the US Federal Reserve, the ECB also bought large quantities government bonds during the pandemic, which reduces the yield on debentures and makes riskier assets, such as equities, more attractive.

Bar graph of monthly% change showing that Stoxx 600 is on its way to the best winning range in 8 years

Revenue growth in the US, where coronavirus closure and travel restriction was less severe than in Europe, has been slower so far during the second quarter.

According to FactSet, companies listed on the Wall Street S&P 500 index saw a 93 percent increase in earnings per share compared to the same period last year. However, the S&P would also end August with its seventh consecutive month’s gains.

“Europe has been under the US for years, but there is a lot going on,” said Julia Scheufler, Janus Henderson’s European equities analyst. acceleration recent months of coronavirus vaccination programs in the eurozone.

A recovery in travel and consumer spending in the eurozone was also likely in the coming months, Scheufler added. ‘People have not really traveled yet, and consumer savings are at a high level. There is much more to come for us. ”

Bar graph of earnings growth, Q2 2021 (%), showing that industries and basic materials increase earnings in the second quarter

But other analysts believe that economic growth in the eurozone, coupled with the earnings prospects of companies and the performance of the Stoxx, will now slow to easier gains from the depths of last year’s recession.

IHS Markit’s Purchasing Managers ‘Index for the Eurozone, which collects managers’ responses to questions such as new orders and rental plans, slightly moderate in August from a peak of 15 years the previous month.

The PMI survey indicates that ‘growth momentum in the euro area is starting to roll’, Bank of America strategists led by Sebastian Raedler said in a research note. The BofA team expects the eurozone economy to expand 8.3 percent in the third quarter of 2021, compared to the same period in 2020, before year-on-year growth in the fourth quarter moderated to 4.4% word. According to Stofx’s index, the year is likely to end at 420 points, about 12 percent lower than the current level.

Bar graph of reported earnings of Stoxx companies (%) exceeding earnings estimates at the highest rate in 5 years in the second quarter 2021

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