Sentiment on these issues has improved in recent weeks, however, and given the high spread levels, there appears to be added value to be extracted in European stocks. Dependence on Russian energy resulted in massive sales of European assets last year: the region’s main source of gas supply was cut off, arousing in market participants the fear of seeing the continent plunge into a serious recession. However, gigantic investments in liquefied natural gas (LNG) storage facilities, coupled with successful efforts to find immediate sources of alternative energy, as well as a healthy dose of luck due to a mild winter, led to to think that Europe’s energy security is not only sufficient to get through the year 2023, but also the winter of 2024. Indeed, the levels of gas stocks in the European Union are now higher than in the past. when the Nord Stream pipeline was closed last September. The result has been some hasty predictions about the outlook for growth in Europe: the scenario of a sharp 5% contraction in GDP anticipated by some commentators has given way to the hope expressed by German economics ministers and other countries of the European Union, which even consider it possible to avoid a technical recession.

The Return To Normal Energy Markets Has Reduced Inflation

European gas prices have fallen to a fifth of the level reached when Nord Stream shut down, leading to a significant decline in inflation figures over the past two months. Along with other key indicators, this suggests that instead of the double inflation spike that many investors feared for Europe, the region has actually weathered the worst and embarked on a course similar to that of the UNITED STATES. The rates market has started to price in this outlook and is now expecting a downward normalization of the ECB deposit rate in late 2023 and early 2024, similar to the expected direction for the US Fed Funds rate. Another advantage of the decline in energy prices: the colossal support plans to which Germany (approximately 200 billion euros) and other countries committed themselves in September will ultimately be far from reaching the amounts planned, which which will support technical factors in European government bonds.

The Divide Between The Center And The Periphery Has Caused Concerns

The ECB tackled this problem at its July meeting by launching the Transmission Protection Instrument (TPI), although the tool remains quite enigmatic in terms of its potential and terms of use. use. Nonetheless, optimism about the periphery has been buoyed by renewed talks about a joint bond issuance by the European bloc and, although difficulties are to be expected, the lingering idea of a fiscal union will only strengthen Europe’s image abroad. The closely followed spread between Italian BTPs and German Bunds has therefore moved from its recent highs around 250bp to 180bp. The return of confidence has helped the euro rebound around 14% from its lows against the dollar, further evidence of the positive interactions within Europe since ECB President Christine Lagarde spoke. on the impact of imported inflation.

This good news, combined with the fact that the euro zone is currently experiencing one of the lowest unemployment rates in its history, has boosted supplier and consumer confidence in recent weeks, as shown by the recovery of the ZEW index. investor sentiment for Germany.

Although uncertainty remains high overall on all markets, a clear upturn is nevertheless emerging at European level. Meanwhile, spreads still include a premium for investing in Europe. It is possible that this will quickly erode given the renewed confidence on the continent.

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