With the S&P 500 slumping to start the opening weeks of Q2, it appears the capital markets are looking towards Europe and European equities for bullish opportunities. That’s especially with case with rate cuts offering a higher degree of certainty versus the United States.
A confluence of factors are contributing to the increased optimism in the European Central Bank (ECB) and their path to rate cuts. Both economies are showing signs of divergence. The European economy is starting to reveal evidence of slowing inflation. This gives the ECB the green light for interest rate cuts.
Additionally, this bodes well for European equities. They tend to exhibit higher beta, moving in tandem with the broader market. If that broader market is showing forthcoming strength thanks to eventual rate cuts, then it should translate into more market gains.
Bloomberg Report on European Equities
“Wall Street strategists are recommending European equities over their US peers as an improving economic outlook and near-record discounts drive gains beyond the technology industry,” a Bloomberg report said. “Market forecasters at Goldman Sachs Group Inc. and Citigroup Inc. say companies that are sensitive to the economy’s ebb and flow — so-called cyclical stocks — will lead the next leg. That bodes well for Europe, where cyclicals dominate benchmark indexes more than in the US, and data point to economic green shoots.”
Even the European bond market is looking more attractive as investors eye fixed income opportunities outside of U.S. Treasuries. One of the reasons is that forthcoming rate cuts appear to be more definitive as opposed to the U.S. Federal Reserve’s path. The Fed is certainly opting for a more measured and methodical path to rate cuts. This is especially true in a time when data still shows that the economy continues to run hot. It also feeds further into the higher-for-longer interest rates narrative that was expected to fade.
“The path for rate cuts in Europe is clearer than in the US,” said Bob Michele, chief investment officer and global head of fixed income at JPMorgan Asset Management, via a Financial Times report. “It is hard to find an economic reason for the Fed to cut rates.”
Lever Up on European Equities
Given that bullish vibes are emanating out of Europe, traders may want to consider using the Direxion Daily FTSE Europe Bull 3X ETF (EURL). For the past six months, EURL has risen over 40% and that uptrend could persist.
With its triple leverage, EURL seeks daily investment results that are equal to 300% of the daily performance of the FTSE Developed Europe All Cap Index. The index itself is a market capitalization-weighted index. EURL’s design measures the equity market performance of large-, mid-, and small-cap companies. It centers on developed markets in Europe, offering deep diversification.
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