Following the Labour Day holiday in much of Europe on Tuesday, trading resumed today with sharp gains for the major indices across the Eurozone. The gains came after a late rally on Wall Street lifted the S&P 500 and NASDAQ to end in the black, reversing sharp losses from earlier in the day. There were no obvious triggers behind Tuesday’s bullish reversal, although news that US President Donald Trump had extended the deadline on deciding whether to impose steel and aluminum tariffs on US allies, including the European Union, Mexico, and Canada, helped to reduce the threat of a trade war. Meanwhile market participants probably didn’t fancy shorting the indices ahead of Apple’s earnings. Well, as it turned out, they made the correct decision because AAPL earnings were stronger than anticipated, leading to a sharp 3% rise in its shares after the bell. This helped to lift US index futures further higher, boosting sentiment in Europe as well.
EUR/USD’s drop to 1.20 has boosted appeal of European stocks
Meanwhile the dollar’s recent upsurge has helped to push the EUR/USD down to 1.20 from a high of around 1.25 a few weeks ago and this has helped to boost the appeal of European stocks in particular. Investors hope that the weaker EUR/USD exchange rate would boost Eurozone exports and lift foreign earnings when companies convert them back to euros.
US earnings strong
In the US, corporate earnings results have been very good so far and this has helped to offset concerns about rising interest rates. As of Friday, 53% of the S&P 500 had reported their results (more now with Apple and several more). Of those 53% of the S&P 500 companies, 79% had reported positive EPS surprises and 74% had posted positive sales surprises, according to FactSet. Barring a downturn in the percentage of positive surprises for the remainder of the reporting companies, this would mark the best quarter since FactSet began tracking this metric in Q3 of 2008. This quarter is also set to be the best since Q3 2010 in terms of earnings growth (23.2%), assuming it stays this way.
Rising yields could haunt US stocks
But despite strong earnings results, Wall Street has been rather hesitant to push higher. This is partly due to the rising bond yields amid expectations of tighter monetary conditions owing to an improving economy and higher rates of inflation. If bond yields in the US push further higher then this would further reduce the appeal of equities in the US, which appear severely overvalued.
Fed unlikely to make significant announcements
Thus, we could see the European markets start to outperform their US counterparts in the months ahead, as the Fed reduces its balance sheet and raise interest rates. Today, the central bank is unlikely to make any significant announcements, but any dovish surprises could see the dollar fall back a little amid profit taking after its recent sharp gains. This would be an ideal outcome for US equities, however.