• News
• 2024-09-06

ECB Likely to Cut Rates This Week Amid Tricky Earnings Season for Euro Stocks

Last week, European stocks experienced a rollercoaster ride. Affected by various news headlines such as the slowing down of external stimulus effects, a surge in expectations for ECB rate cuts, the cooling of US inflation constraining the extent of rate cuts, and developments in the Middle East situation, European stocks went through a rollercoaster-like performance.

The main stock indices ended the week with a slight increase. Over the past five trading days, the European STOXX 600 index rose by 0.55%, and the Eurozone STOXX 50 index rose by 0.90%.

The market is now waiting for the ECB to initiate its third rate cut of the year this Thursday. Recently, ECB President Lagarde and board members Kazaks, Villeroy, and Stournaras have all given strong signals, stating that "consecutive rate cuts are very likely," and the market has largely digested the expectation that the ECB will cut rates again in December.

The trend of the ECB accelerating the pace of rate cuts to lift the constraints of high interest rates on the economy is becoming increasingly clear, creating a more positive liquidity environment for the European stock market in the fourth quarter. However, with risk events such as the US election and the escalation of geopolitical situations, how should investors respond?

Advertisement

Looking for a stable main line, the three major European stock indices fluctuated last week. The German DAX 30 index rose by 1.32%, the French CAC 40 index rose by 0.48%, and the British FTSE 100 index, dragged down by mining stocks, fell by 0.33%.

Specifically, looking at sector performance, the mining and luxury goods industries saw significant declines due to the weakening of external stimulus effects. The European STOXX 600 Mining Index (SXPP) fell by 3.12% last week, Anglo American fell by 6.51% on a weekly basis, Rio Tinto fell by 4.63%, and Glencore fell by 2.38%. The luxury goods industry, which experienced a surge in early October, saw a pullback last week, with LVMH falling by 1.94%, and Hermès, Kering Group, and Richemont all suffering significant stock price declines on Tuesday, before recovering slightly in subsequent trading days.

Driven by the Wall Street tech stock boom, European-related sectors also had eye-catching performances. Last week, ASML, Europe's largest technology company, rose by 1.81%, and SAP rose by 3.96%. From the recent shipment performance of NVIDIA and AMD, the demand for artificial intelligence-related products remains strong, and the high valuation narrative of tech stocks may continue to be supported to a certain extent.

Looking ahead to the fourth quarter, the European stock market is expected to be influenced by a loose cycle and positive policies from China, providing more positive macro factors.

Li Ershi, Chief Analyst of Macro Finance at Guotou Futures, analyzed to 21st Century Economic Report reporters that as the fourth quarter begins, the liquidity environment of overseas developed markets is generally stable, supported by the Fed leading overseas central banks to cut rates and stabilizing geopolitical risks during the election phase.At the same time, Li Ershi believes that the return of China's economic policy is also a relatively certain main thread. Last week's meeting of the Ministry of Finance responded to the market's hot concerns about fiscal policy, which is conducive to consolidating the market's confidence in the strength of fiscal policy support for the real economy. On the one hand, the support for debt resolution is strong, which brings some benefits to local governments in promoting project investment and forming physical work volume. At the same time, the special treasury bonds supplement the core capital of large banks, which is beneficial to the stability of the financial system and the rebound of domestic credit factors. For investors, they can participate in the opportunities of some cyclical and consumer industries in Europe that benefit relatively from the repair of China's domestic demand.

How to layout under the interweaving of risks?

However, the European STOXX 600 index has now fallen 1.2% from its historical high two weeks ago, and the rise is still constrained by multiple risk factors, including concerns about the Federal Reserve's slight interest rate cut or suspension of easy monetary policy in November, the direction of the US election, the Russia-Ukraine conflict, and the escalation of the situation in the Middle East.

Daniela Hathorn, a senior market analyst at Capital.com, believes that we are currently in an uncertain stage. It is expected that the economy will not fall into a recession, interest rates remain high, and corporate profits remain flexible, but expectations are quite low again.

Mabrouk Chetouane, the head of global market strategy at the French Foreign Trade Bank Investment Management Company, said that we are facing many risks, the global situation is not very optimistic, a bit depressing, and the market is indeed in a wait-and-see state.

"Overall, after all, Europe is currently in a weak fundamental stage, and the high stock index is relatively differentiated, and it is more sensitive to changes in risk factors and liquidity." Li Ershi said that as the US election approaches, the market may have some fluctuations and wait-and-see sentiment, and then it can focus on the continuity of the new president's policies after the election is settled, such as stabilizing the US dollar liquidity, controlling the risk of not losing control of geopolitical risks, and stabilizing China-US relations, and then further consider whether to increase the allocation after it is clear.

This week, the European stock earnings season is about to start. Barclays strategists said last Wednesday that in the recent profit warnings and weak economic data, the performance of the European third-quarter earnings season seems to be very difficult.

Whether the performance and profit expectations can meet expectations will bring significant short-term fluctuations. Recently, analysts have lowered the third-quarter profit expectations of most European listed companies, which provides a favorable opportunity for the earnings report to exceed expectations. However, institutions generally have high growth expectations for 2025, which also means that any slowdown in consumer demand, downward adjustment of performance guidance, and other slight movements will put pressure on the stock price. This week, the research reports worth paying attention to in Europe include ASML, LVMH, and Volvo.

The European Central Bank's interest rate cut is "almost a foregone conclusion", and the expectation of the Bank of England's easing has increased.

Clues from all aspects are supporting the European Central Bank's decision to cut interest rates by 25 basis points this week.The minutes of the European Central Bank's (ECB) September meeting, released last week, indicated that policymakers seemed satisfied with the decline in inflation at the previous month's gathering. However, given the ongoing pressures, they advocated for a gradual easing of policies. Christine Lagarde stated during her European Parliament hearing on September 30th that the ECB is increasingly confident that the inflation rate will fall to the 2% target, which will be reflected in the next policy moves. This has essentially been seen as a clear hint of an interest rate cut.

Many economists believe that an interest rate cut in October could trigger a series of faster and more substantial easing policies to prevent inflation from persistently falling below the target. Jens Eisenschmidt, Chief European Economist at Morgan Stanley, predicts that by December 2025, the ECB's benchmark interest rate will be halved to 1.75%, and this level is still likely not the end of the easing cycle.

Li Ershi stated that from last year to this year, as the year-on-year growth rate of inflation in the United States and Western countries has fallen to a low level, it has created conditions for interest rate cuts. Relatively resilient consumer services in the U.S., along with the Federal Reserve's choice to cut interest rates, have made it expected for Europe, with its weaker fundamentals, to also initiate rate cuts. Looking at the medium term, the interest rate cut cycles of the U.S. and Europe are roughly in sync, and the probability of two more rate cuts within the year is high.

Of course, for the fourth quarter, the relatively favorable scenario supporting this judgment is that the U.S. fundamentals cool slightly, and the pressure of inflation rebounding is not significant. Meanwhile, although geopolitical situations may cause disturbances, their impact on inflation is limited. The relatively unfavorable risk scenario could be that after the Federal Reserve's rapid 50bp interest rate cut, there are significant signs of rebound in U.S. inflation data, and the Middle East situation once again exerts pressure on imported inflation expectations through oil and shipping prices.

Compared to the ECB's almost certain interest rate cut, the Bank of England's (BoE) November rate cut still has considerable uncertainty.

After choosing to stand pat in September, BoE Governor Bailey stated in a media interview on October 3rd that if inflationary pressures continue to weaken, the central bank's rate setters might "act more aggressively" to reduce the cost of borrowing.

The PMI survey for September showed that price pressures in the UK private sector fell to a 42-month low, indicating a decline in both overall and core CPI as oil prices fell to negative year-on-year values.

Currently, the market expects a 25 basis point rate cut by the BoE in November with a 75% probability, but there is still disagreement within the BoE. The Bank of England's Chief Economist Huw Pill stated last week that "interest rate cuts should be gradual," leaning towards a hawkish stance.

This week, upcoming data releases including UK unemployment rates and the Consumer Price Index (CPI) will provide more reference for the policy decision on November 7th and the budget case at the end of October.

Data releases for the Eurozone include the ECB's bank lending survey and the Eurozone industrial production monthly rate, while the EU Summit is scheduled for the 17th to 18th. Lagarde's speech after the interest rate meeting will provide more signals for further rate cuts. In addition, the final inflation values for France and Spain in September, as well as the ZEW sentiment indices for the Eurozone and Germany, will also be announced this week.