The Week In Hindsight, 09 May 2014

European bonds rallied this week while equity indices also appeared to be positioning themselves for further gains as Mario Draghi gave the clearest indication yet that further policy action from the ECB was imminent.

The head of the Governing Council alluded to exchange rate strength, recent volatility in money market rates and a “too prolonged period of low inflation” when reasserting the ECB’s readiness to act and hinting of policy maker bias toward action at next months meeting.

The euro declined as a result, while continental indices pared earlier losses resulting from the ECB’s initial decision to hold rates. Equities also benefited from what has been widely perceived as a Russian U-turn on Ukraine which saw President Putin publicly denounce the actions of separatist militants while imploring them not to go forward with a public poll on secession of large parts of the industrial east from the remainder of Ukraine.

German, Spanish and French Indices


While further reports that Russian forces were set to withdraw from the Ukrainian border appeared not to have evolved into reality, and although the rebels continued to hold large parts of many industrial cities undeterred, Putin’s move did go some way toward defusing international diplomatic tensions and market concerns over a further escalation of last week’s violence.

The easing of tensions has now cleared the way for investors to focus on the fundamentals of the continental recovery and the release of corporate earnings figures for Q1 2014. While there have inevitably been some disappointments so far, the earnings season overall has been remarkably positive.

This is while a number of international conglomerates, with significant exposures to Europe but reporting in the US, have voiced notably positive views for business conditions on the continent over 2014, indicating that the reporting season for European companies may not arrive to be quite the bloodbath that many have envisaged. 

We continue to feel that the prospect of lower rates and added unconventional stimulus on the continent are is likely to underpin European equities over the near term. This is while we also believe that the positive fiscal developments of 2013 and a wider global economic recovery should eventually lead to a moderate acceleration in the pace of growth on the continent, which would be positive for earnings at those companies with a revenue exposure.

For further information relating to our outlook on Europe, please see our Fidelity European Values Investment Trust report.

Quotes from Factset research note – May 2014

“we are cautiously optimistic about our outlook in Europe, despite the continuing volatile operating environment.” – Coca-Cola (Apr. 15)

“we see strength in Europe. And again, it’s reflected in our guidance, but we actually see a strong performance collectively in Europe this year.” – Carnival Corp. (Mar. 25)