Euro area’s blue-chip index eyes highest level since 2007

BLOOMBERG

The euro area’s blue-chip index is finally set for its highest close since the global financial crisis.
The Euro Stoxx 50 gained as much as 0.3% on Monday, putting it on track to close at its highest level since December 2007, before trading little changed in London. TotalEnergies SE, Airbus SE and Prosus NV outperformed.
The gauge got a lift as luxury stocks rallied amid upbeat sales reports from Hermes International and LVMH on a boost from China’s reopening. LVMH’s gains briefly ranked it as the world’s 10th-biggest company. Luxury shares were lower.
James Athey, investment director at Abrdn, said the outlook for luxury stocks continues to be positive even amid signs of slowing growth, given their “acyclical” nature and accumulated consumer savings. The sector is defensive “simply because the wealthy are much less sensitive to changes in economic conditions,” he said.
While European stocks have rallied this year following a slump in 2022 on inflation worries, it’s taken the Euro Stoxx 50 far longer than its peers to reclaim these levels, partly due to its exposure to the banking sector, which saw several years of underperformance against the backdrop of negative interest rates. The pan-European Stoxx 600 has hit new record highs since the global financial crisis, whereas the blue-chip index last hit a record in 2000.
“After the European debt crisis and the housing crisis, European banks had to de-lever their balance sheets by a large amount,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “That meant they had to curtail lending for a long time and more aggressively than their US counterparts and that’s why they went nowhere for the better part of a decade.”
This year, the Euro Stoxx 50 is outperforming the Stoxx 600 by far with banking stocks resuming a rally following brief turmoil in March. In terms of points, LVMH, ASML Holding NV, L’Oreal SA, SAP SE and Hermes have been the biggest gainers in the index, which is up 16% this year, compared with a 10% rise for the Stoxx 600.

Federal reserve Pricing, Earnings Uncertainty Pressure Stocks
Contracts on the technology-heavy US Nasdaq index slipped, as the possibility of further Federal Reserve policy tightening lifted Treasury yields and investors stayed on the sidelines ahead of a set of crucial bank earnings.
Contracts on the interest rate-sensitive Nasdaq 100 traded in the red and those on the S&P 500 flat-lined, following moves lower when markets were unnerved by Fed Governor Christopher Waller’s comments favouring further policy tightening. His views caused investors to ramp up bets on another rate rise in June, following one in May, and also to scale back expectations for rate cuts later in the year. In Europe too, the Stoxx 600 Index erased an earlier gain.
Treasury yields ticked higher, with rate-sensitive two-year borrowing costs rising to around 4.14%, up more than 15 basis points. Still, data points to inflation and employment markets steadily softening, encouraging some equity bulls. First-quarter earnings from JPMorgan Chase & Co and Citigroup Inc also outpaced expectations.
“After the data last week, there is a less pressing need to hike rates, plus there is an apparent easing in banking tensions,” said Peter Kinsella, head of FX strategy at Swiss asset manager UBP. “If we get a Fed rate hike in May, I think it will be one and done.”
Despite this, Kinsella predicts headwinds for equity markets from share valuations that remain expensive, especially in relation to a slowing economy. Investors are preferring to park their cash in money-market funds, he noted.
On currency markets, a gauge of the dollar steadied, supported by the additional rate-hike pricing. The index has just endured its longest stretch of weekly declines in almost three years and hedge funds are betting this is about to reverse.