The European stock indexes fell sharply last week.
The DAX plunged by 3.1% to a three-month low, led the trend, but the French CAC, which lost 2.25%, was not far behind.
The main reason for the pressure on the European stock markets was the strengthening of the Euro, which jumped by 1.75% against the US dollar to a two-year high.
It was a matter of time before the strengthening of the Euro began to erode the performance of European equities, especially with the export companies, which are particularly large on the German stock exchange.
However, the inferiority of stocks in Europe relative to the US stock market is not expected to be prolonged, first of all the circumstances of the strengthening of the Euro are based on the improvement in the European economy.
Another factor that supports investment in Europe compared to the US is the fact that US price hikes are spread among fewer shares than in Europe.
Over the past year, 70% of all shares in the S&P500 index have risen, compared to 80% of the BE500 index, although the S&P500’s yield was 5% higher than the European index.
A change in the ECB’s messages, as well as a loss of confidence in Trump’s capabilities to do something significant have led the Euro to strengthen since April at 10.1% against the US dollar.
Unlike the US, where the share of exports in GDP is low, the strengthening of the Euro constitutes a significant frontal wind for the economy, with the negative effects of the appreciation expected to be seen in European companies’ reports as early as next quarter.
Because of this, the European indices fell sharply in the last month and returned to their levels on the eve of the elections in France.
For the same reason Draghi made sure to note clearly in his announcement that the ECB’s monetary policy also depends on the financial conditions in the Euro zone.
In fact, the strong Euro and its effects on growth, firm profits and inflation is the main card that Draghi can pull out of the sleeve if German pressure continues.
Therefore, even if the process of reducing the quantitative easing will begin soon, it is expect very clear messages from the ECB regarding the interest rate in the Euro zone will remain at its level for a long time to come.