European Markets Outperform US: Can the Momentum Last Amid Inflationary Pressures & Rate Hikes?

The US market closed lower, giving up its year-to-date gains.

In early 2023, the Eurozone demonstrated its resilience and strength, performing remarkably despite sharp interest rate hikes. Meanwhile, the US market has struggled to maintain its upward momentum, with the S&P 500 and the Nasdaq closing lower, giving up their year-to-date gains.

However, the story is quite different in Europe, where two of the continent’s major stock markets, the DAX in Germany and the FTSE in the UK, have shown impressive resilience in the face of inflationary pressures and rising interest rates.

The German DAX, comprised of the country’s top 30 companies, has performed particularly well, rising by an impressive 10.3% this year. This increase is a testament to the strength of the German economy, which has shown remarkable resilience in the face of global headwinds, including trade tensions and slowing economic growth.

Likewise, the London FTSE 100, composed of the top 100 companies in the UK, has added 5.6% to its value in the face of inflationary pressures that have been persistently high in the UK over the past year. This uptick is a clear sign that the UK’s economy is also in good health, despite the ongoing uncertainty surrounding the US and China relationship.

European Markets Soar: Can The Momentum Be Sustained?

The impressive gains made by the DAX and FTSE in the early days of 2023 have been the source of much optimism among investors. However, there are growing concerns about the sustainability of these gains in the long term. Moreover, the current progress needs to indicate stability, and much will depend on the actions of central banks in the future regarding monetary policies.

The European Central Bank (ECB) has already indicated that it is considering rate hikes in response to rising inflationary pressures, which have been persistently high in the Eurozone over the past year. However, while the ECB is under pressure to act, it will need to tread carefully, as any sudden rate hikes could undermine the fragile recovery in the Eurozone and potentially lead to a recession.

Analysts are closely watching the economic data coming from Europe to understand better what we can expect in the future. Today, we expect final manufacturing PMIs from several countries in the Eurozone, including Germany, Spain, Italy, France, and the UK, which are set to give a mixed outlook regarding the economic activity.

Analysts expect manufacturing to improve in the UK and Spain, with PMIs of 49 and 51, respectively, while Italy is expected to decline to 47.5 and France and Germany to 46.3. Yesterday, the inflation data from France showed it had hit a new high of 7.2% due to increases in food and service prices, while in Spain, it moved back up to settle at 6.1%.

Analysts expect Germany’s CPI to decline to 9% from 9.2%, with the risk of an upside surprise due to yesterday’s data from France, Germany, and Spain. The inflation outlook already points towards a rate hike for the ECB, with 4% as a reasonable pause rate.

However, the central bank must carefully monitor economic data and trends before making decisions. The ECB’s President, Christine Lagarde, has already stated that the bank will be data-driven in its decision-making process, which suggests that they will monitor the economic data closely before making any decisions.

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