Euro 2024 kicks off in Germany on June 14 and football fans across the world will have a month to enjoy watching many of the sport’s top talent. The week before, also in Germany, the ECB is expected to kick off an easing cycle, becoming the first G4 central bank to cut rates following global monetary tightening of unprecedented speed and scale to combat inflation .
But the ECB is not easing in reaction to a sharp slowdown in growth, as is typically the case. Rather, the central bank is set to cut rates just as Europe’s economy appears to be bottoming out. Real GDP growth bounced back into positive territory in the first quarter, while leading indicators suggest global and European manufacturing is set to rebound. Meanwhile, the decline in inflation that is setting the stage for rate cuts is boosting European real incomes, which should underpin consumption.
The ECB easing into a growth acceleration is a uniquely positive backdrop for Europe’s risk assets. And this powerful combination comes at a time when European equity valuations are near record lows relative to global equities. European credit spreads, while historically narrow, still offer more cushion than their US counterparts.
Investors could enjoy a European Summer, with the region potentially outperforming amid a broadly constructive backdrop for risk assets. We remain overweight global equities and neutral fixed income as global nominal GDP remains healthy and bond volatility subsides.
