US President Trump’s forceful intervention in seeking to end the Ukraine-Russia conflict has boosted European equities and the EUR. Germany’s plan to boost infrastructure and defence spending as a fallout of a ceasefire in Ukraine is likely to fuel European assets further, benefitting diversified portfolios.
USD breaks lower, a positive for risk assets. The US dollar index has broken below key support. USD weakness is typically positive for risk assets as it eases global financial conditions. This is another reason to stay invested and diversified.
Buying the US equity dip. US equities have pulled back sharply from record highs as consumer and business confidence flagged and earnings estimates were downgraded due to Trump’s tariff plans. However, the latest decision to hold off tariffs on imports from Canada and Mexico following pushback from domestic companies shows the limitations of such tariffs. The S&P500 index has broken below a key uptrend line since 2023, and is testing the 200-day moving average. Standard Chartered in its weekly review said it would use the dip in US equities to add to top convictions – technology software, communications services and banks.
Europe benefits from Ukraine ceasefire talks. The geopolitical risk premium hanging over European assets since the Ukraine-Russia conflict escalated three years ago has declined sharply this week after US President Trump publicly pushed Ukraine President Zelenskyy for an early ceasefire and abruptly ended military aid. This has forced European allies to come up with a ceasefire proposal and a plan to boost their own defence spending. Meanwhile, Germany’s incoming coalition partners this week agreed to create a EUR 500bn infrastructure fund to revive EU’s largest economy and proposed to ease Germany’s debt restrictions to boost defence spending.
European stocks still cheap: This turn of events has pushed the MSCI Europe equity index to a record high in USD terms and the EUR to a four-month high. Three of Europe’s four overweight equity sectors (finance, communication services, and healthcare) are among the top-performing sectors this year. The house continues to prefer these sectors. SC said its exposure to Europe via a diversified portfolio means our global balanced allocation is up 1.7% YTD, despite US equities falling. Even after the rally, European stocks remain inexpensive (14x 12-month forward earnings) vs. US (21.1x), while European earnings estimates have been upgraded.
Europe’s near-term drivers: European equities and the EUR appear overbought, raising the risk of a near-term consolidation. A continuation of the rally will likely depend on:
a) further progress in Ukraine ceasefire talks;
b) European governments easing debt-ceiling restrictions to boost defence and infrastructure spending;
c) Germany’s proposed coalition getting two-thirds support in the new parliament to ease the constitutional debt limits to boost spending (coalition partners need the support of the left and ‘green’ parties to get to the two-thirds mark);
d) the European Union negotiating a trade deal with Trump to ward off proposed US tariffs; and
e) the ECB continuing with rate cuts (after this week’s cut).
USD still faces further downside, despite being oversold. The broad dollar index (DXY) plunged more than 3% this week to around 104, breaking below its 200-day moving average. The drop was primarily driven by a surge in the EUR and GBP. While downside momentum remains strong, the USD looks oversold, raising the chance of a near-term bounce. The DXY index has traded in the 100-110 range since 2022, so it has another 4% potential downside before it tests long-term structural support. We would sell the USD on rallies.
Position for further USD downside through a bearish USD/JPY idea. The Fed is likely to resume rate cuts should flagging confidence hurt job creation (watching February’s non-farm payrolls data on Friday), while the BoJ hikes rates as Japan’s wage growth accelerates amid labour shortages.
