May has had an interesting star performer so far in European indices like the Euro Stoxx 50, German DAX and French CAC 40.
All three are continuing an upbroken positive run since the beginning of this month, with the FTSE 100 also doing well. The German DAX is up 4.4% this month, while the CAC 40 is up 3.2% and the Euro Stoxx 50 is up 3% in May so far.
But what is causing these rallies? And will they continue? We spoke to David Morrison, analyst at Trade Nation, to find out more. Edited excerpts:
How are the Euro Stoxx 50, German DAX and French CAC performing this week so far?
The Euro Stoxx 50 and French CAC are trading a touch below their respective record highs hit back at the end of March. The German DAX ended Friday at its all-time high. Like their US counterparts, the three European indices struggled in April following a near-relentless bull run from late October to the end of March.
Investors were forced to dial back their expectations for rate cuts from the US Federal Reserve, following a disappointing series of inflation releases throughout the first quarter of 2024. We’ll get the latest updates on US inflation tomorrow. We’re starting the week on the back foot, and it feels as if some profit-taking is creeping in.
Are we likely to see May 2024 described as the best month for these indices in some time?
It’s far too early to say. We’ve had a very good start to the month, but we’re only half way through. The main point is that we’ve seen an impressive bounce-back in market sentiment after a disappointing April. But even that must be put in perspective, as April was the first time we saw a significant pull-back in equities since the rally began five months previously.
What is causing this rally?
First of all, the sell-off in April was quickly reinterpreted as an overreaction. There was nothing panicky in terms of intra-day sell-offs, and ultimately investors viewed the pull-backs as fresh opportunities to take on long side exposure.
Investors no longer expect the Fed Funds rate to be under 4% by year-end. But they are convinced that the next move in US rates will be down, despite stubbornly high inflation. Bond yields have pulled back from their highs and this is helping to boost sentiment.
At the same time, the first quarter earnings season has been supportive. Of the 92% of S&P 500 constituents that have reported, 78% have beaten expectations on EPS, and 59% on revenues. Year-on-year earnings growth is the strongest in two years, although stocks are a touch overvalued.
In your opinion, is this positive momentum likely to last?
In my opinion, no. I think we’re in the last leg of a long rally which has seen the Dow, S&P and NASDAQ all hit record highs. It’s difficult to see where the catalyst for further gains will come from. Inflation is still way above the Fed’s 2% target, and the yield curve (2-year/10-year) has been inverted for around two years. It’s quite likely that we start to see a turndown in US economic data (see recent employment releases) that signal that a recession is on its way. That won’t be good for equities.
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