Euro hits three-year high as optimism grows across Europe

The chance of a pro-European coalition in Germany has boosted confidence in the continent

Abhinav Ramnarayan
Monday 15 January 2018 11:46
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Europe is showing signs of sustained economic growth
Europe is showing signs of sustained economic growth

The euro hit a fresh three-year high on Monday as optimism around growth buoys expectations of tighter policy from central banks, while the chance of a pro-European coalition in Germany also boosted confidence in the continent.

With the world in general and Europe in particular showing signs of sustained economic growth, global stocks benchmarks jumped to fresh highs, even though investors are now pricing in the withdrawal of central banks’ extraordinary stimulus.

That view was given further fuel last week by an account of European Central Bank (ECB)discussions, which suggested policymakers could soon start preparing the ground for a reduction in support.

Just before the ECB first announced its massive government bond purchase programme, the single currency rose to its highest since December 2014.

Nor is the ECB the only game in town: Bank of Japan Governor Haruhiko Kuroda offered a positive view on his nation’s economy and inflation on Monday, sending the yen to a four-month high against the dollar.

“The latest leg up in the euro has clearly come from optimism that the German government is moving towards agreement for a coalition government,” said Investec economist Victoria Clarke.

German Chancellor Angela Merkel’s CDU party and the Social Democrats (SPD) are moving towards formal coalition talks, soothing concerns around Europe’s largest economy.

The SPD’s pro-European stance – leader Martin Schulz recently argued for a “United States of Europe” – also strengthens the case for investment in the euro.

“This follows an earlier move triggered by the crucial line in the ECB account which has got people thinking about when the first move on rates will happen,” said Ms Clarke.

Eurozone money markets now price in a 70 per cent chance of a 10 basis-point hike from the European Central Bank by the end of the year, up from 50 per cent a week before.

The strength in the euro pushed European stocks a touch lower, as exporters were hit by the currency strength.

The slight fall comes in the wider context of a storming 2018 for world stocks so far, as investors bask in strong growth numbers from most of the world’s largest countries.

MSCI’s all-country index of world stocks soared to new records on Sunday evening, and MSCI’s Asia ex-Japan index breached its 2007 high for the first time to set a new all-time record.

Investors were also optimistic that Chinese gross domestic product data for the December quarter, due on Thursday, would show growth of at least 6.7 per cent for the world’s second biggest economy.

The momentum of global economic growth through the closing months of last year is being underlined by the early stages of the fourth-quarter earnings season.

Earnings for S&P 500 companies are expected to increase on average by 12.1 per cent in the quarter, with profit for financial services companies likely to increase 13.2 per cent, according to Thomson Reuters.

Wall St stocks set new records on Friday, but US markets will be mostly closed on Monday for the Martin Luther King Day holiday.

Although the US Federal Reserve is expected to continue to hike rates in 2018, this has been largely priced in and investors are starting to position for central bank action in Europe and Japan instead.

Reuters

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