The US continues to be the world’s safe haven, as the bull market in US stocks has continued over the past month while euro area stocks have been left behind. S&P500 reached another high yesterday, 1.5% above the recent peak, while Euro Stoxx 50 is still 8% off the recent peak reached in June this year. S&P 500 is up more than 10% this year, while DJ Euro Stoxx 50 is down 1.5%. The main attraction in the euro area has been the bond market, where German 10-year bond yields have traded down to the recent low of just below 80bp, whileUS 10 Year yields have increased 20bp over the past month to 2.35%.
The explanation behind this is clearly a significant underperformance of the euro economy this year compared with the US. Optimism among US businesses and consumers is the highest in many years and has recently received new support from falling gasoline prices. The major disappointment this year has again been the lack of growth in the euro area. Going into 2014, optimism was the highest in a long time that now was the time for the euro area to join the global recovery as it put the euro crisis behind. Based on this, money flew into the euro area stock markets in 2013 at a scale rarely seen. However, with dashed hopes and renewed structural pessimism on the euro area, investors have fled the European continent once again, at times at panic speed as in the middle of October.
Euro corporates have stepped on the brakes
So what’s behind this shattered growth performance in the euro area? Knowing the answer to this is important to help us understand whether this will continue or whether 2014 was another swing of the pendulum towards pessimism only to swing back in 2015 due to renewed momentum in the euro recovery. To answer this question, several important observations need to be made.
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