QE vs. Rate Hike, European vs. American markets

The rally 2015, if it lasts, will be European. In fact, it is already. On the one hand, the German DAX30 and the French CAC40 have increased 21 percent and 17 percent respectively YTD. On the other hand, the British FTSE100 grew just 2.4 percent and the US SP500 fell 0.91 percent YTD. Such outperformance of continental Europe vs. America was last seen in 2000, weeks before the markets crashed because of weak, if not inexistent, results from the dot-com bubble’s companies. The explanation for this is twofold: first, the ECB has started a massive 1140 billion euros bonds-buying program. Thanks to record low interest rates decided by the ECB, banks and funds have to opt for assets which offer better return, therefore there’s no better fuel for a strong rally in European stock markets.

Second, the Euro has weakened 18.38 percent against the US Dollar, approaching exchange parity unseen since November 2002, turning European stocks into cheaper opportunities than their American counterparts. Also, exports from continental Europe should get a strong boost after a decade-long depreciation of the trade balance, quickly improving financial results of large companies like Airbus, Audi or LVMH. Although a number of factors can potentially threaten the European rally, as long as the American markets keep underperforming and the Fed’s rate hike gets likelier to happen this year the geographic choice of Mr. Market for his 2015 allotment is Europe.