A not-so-dovish tone from the Fed had already hit the mood earlier this week, and now with Trump’s latest trade bombshell, European stocks are on track for some serious damage heading into the weekend.
Expectations of central-bank easing have allowed equity traders to brush off the deteriorating macro economic backdrop and trade tensions. But the new tariffs and the lack of improvement in the economic outlook could finally bite. Despite no earnings growth so far this year globally, expectations are still high for the rest of the year, and the consensus looks too optimistic for the fourth quarter, HSBC strategists say.
HSBC sees the consensus EPS skewed to the fourth quarter, with about 10% growth expected for most regions. Their analysis of 60,000 corporate earnings calls globally paints a gloomy picture, with the impact from tariffs looking worse than originally anticipated. On top of that, the occurrence of the word “destocking” by U.S. firms has reached its highest level since the financial crisis, making a near-term resolution of trade tension a necessary condition to avoid further earnings pressure.
The problem is, the U.S. and China still seem to be playing the blame game, while a fall in global trade volumes is hitting exporters in the U.S. and emerging markets. So far, European exporters have shown some earnings resilience, with estimates standing at 6% growth this year, according to HSBC strategists. This may not last, they say, as a further decline in global trade, autos tariffs and Brexit provide downside risks.
The strong dollar/weaker euro should keep providing some support to European exporters for now, as the Fed doesn’t seem too keen on weakening the currency. The flip side is it may have consequences for miners and oil companies, the biggest underperformers yesterday. Mining stocks need positive trends in commodities prices, and at the moment, the dollar is not supportive. The Dollar index touched a two-year high yesterday and is hinting at further weakness.
Credit Suisse strategists remain positive though, and recommend staying overweight on the mining sector, as China’s manufacturing investment should stabilize and valuations aren’t demanding.
Things could change in the coming months. “There is something exciting about looking at EURUSD these days,” writes Nordea Senior Macro strategist Sebastien Galy. The market is likely to have priced in rate cuts until September, but beyond that, innovative measures from the ECB on bank debt should invert the trend, while falling U.S. inflation could push the euro toward the $1.16 level, he says. It’s just above $1.10 currently.
In the meantime, Euro Stoxx 50 futures are trading down 2% ahead of the open.
