You don't need to be who knows how old to remember situations in which old Europe, in a jolt of pride, felt that it diverged positively from America. These situations have historically been of three types.
The first type was when it happened to note smugly that we didn't have some big problem of theirs. From the 2008s until XNUMX, for example, it was always argued that Americans lived beyond their means by accumulating foreign debts while we morally superior Europeans maintained a sober standard of living and healthy self-discipline, which was then rewarded by a mark and then by a euro in constant structural appreciation against the dollar.
In the same way, we have often told ourselves that we did not experience their pathologically risky behavior during stock or real estate bubbles because we were not greedy like them. Except then discovering that, despite not having created bubbles of the same size in our house, we had however made a large contribution to financing theirs, then blaming the explosion.
The second type of self-aggrandizement contrasted the seriousness of our monetary policies with the laxity of theirs. When they feel the wind of the end of the cycle and an approaching recession Americans are very quick to lower rates and in throwing the dollar down and not caring one bit about inflation, which in a recession takes care of itself. We (particularly if Germans) look very much at inflation (the past one even more than the future one) and at the end of the cycle, when inflation is typically higher, we don't let our guard down, but we fight with even greater vigor the enemy who is to die alone.
And so we raise rates in July 2008, just weeks before everything crashes. Then we raise them again not once but twice in 2011 as soon as things look better. All this while America goes from one Quantitative Easing to another, under the critical and severe gaze of Europe, which is careful not to do such Third World things. Except then falling back into recession, we and not America, hastily lowering rates three months after having raised them and adopting the much despised Qe with such enthusiasm that today, like the ECB, it has a balance sheet even more swollen than that of the Fed ( and in a year ours will be even bigger while theirs will be smaller than today).
The third kind of smug speech we make that month of the year when it happens that Europe performs better on the stock market than America. A phase of divergence has begun, we ask ourselves excitedly, perhaps this is the right time for us to disengage from them? In the past, to tell the truth, one has never gone beyond a few weeks of performance more brilliant or less dull than theirs. This time, however, it may be different.
Il Macron trade he's actually taking over the exhausted Trump trade. The Trump trade, the last echo of which is still audible in the American stock market at an all-time high (but no longer in the dollar or in rates), lasted five months (in the last two only a few stocks have risen and many have fallen). The Macron trade could last as many.
Europe has two factors on its side, the first political and the second economic. On the political level we do not expect miracles or sensational turning points, but a labor reform and some cuts in public spending in France, combined with a prudent re-launch of the European integration process will in any case make a big difference compared to the recent past. It won't be difficult to do better than Hollande e it will not be difficult to do more than Juncker. Italy remains, of course, but in October we will have some form of grand coalition that will keep the country glued. In short, it will not necessarily be an exhilarating life in Europe, but it will be better, much better, than the hibernation that precedes the decomposition we were getting used to.
Economically, Europe is enjoying the benefits deriving from having abandoned his recipe, austerity, and from having adopted, with two or three years of delay, the American road. Europe's better relative performance this year (and probably next) comes not from the superiority of its model but from adopting what has been successful in America. Those who are healthy struggle to be even healthier, those who are sick can instead improve a lot if they take care of themselves properly
The spaces for the Macron trade are good, but, just as we saw with the Trump trade when the rate and the dollar collide with the stock exchange at a certain point, the euro and the stock exchange will compete with each other for who will grab the biggest share big, while quality bonds will suffer, though not dramatically.
In any case the euro is undervalued against the dollar, the spread between Bunds and Treasuries is excessive and a European stock exchange which capitalizes 11 trillion cannot be reconciled with an American stock exchange which capitalizes 26. Everything will have to normalize, with a stronger euro, weaker Bunds and a higher stock market.
For those who are on the markets, the problem will be to understand if and when the scorpion that promised not to bite the frog will start biting it again. If and when, that is, Europe's fiscal and monetary policy will go back to being European, or rather German. If and when, in other words, we will hear again about austerity and troikas (repainted by the sole minister of finance and ESM) on a fiscal level, a strong euro on a currency level and higher rates, at the end of Qe, when in 2019 Weidmann will take the place of Draghi
It is on these terrains that will be fought in the coming months and years in the muffled rooms of Berlin, Frankfurt and Brussels. Almost nothing will happen until September. Then, after the close of the European electoral cycle in October, we will have a first verbal swerve on rates and Qe. In 2018 we will have first the reduction and then the end of Qe. In 2019 we will have the first rate hikes, with the euro already around 1.20.
In addition to itself in an overly German version, Europe will have to fear eventual mishaps in America, China or emerging countries. Europe has never exported as much as today and the vitality of its outlet markets is essential to maintain its growth at current levels. The problem is that America and China are in a mature phase of the cycle, even if not yet terminal
The stronger euro will take some of the polish off the European stock exchanges and distribute it to the others. Even with this handicap, the European stock exchanges seem to us. in any case to be overweighted, with a preference for the most depressed sectors of the weakest countries.
Those who are invested in dollars and do not want to give up on diversification will be able to console themselves with the interest rate differential which will slowly reduce and thus cushion the decline of the dollar. Those who want to speculate on the upside of the euro without having to pay two points a year of negative carry can go short the yen and long the euro.
