Aurelia Butler

(Reuters) – Global equity investors are finding financials-heavy European markets more alluring than their U.S. counterparts packed with expensive technology stocks in their rush for better returns amid growing signs of interest rates staying higher for longer. Banks accounted for nearly 16% of the STOXX 600 index and have benefited from the high-rate environment, gaining nearly 20% to hit their highest in almost five years.In contrast, 35% of the S&P 500, the world’s largest index by market value, are technology companies. Tech stocks on the index have gained just 9% this year as rising rates make future profits for tech companies less valuable. Looking at the broader market, the STOXX 600 has added nearly 7.5% in 2023, more than double the 3.4% gain in the S&P 500, marking its strongest performance versus the U.S. benchmark since 2017, according to Refinitiv data.”In a market that prefers value-style investments in a high interest-rate environment, that clearly works in Europe’s favour,” said Edward Stanford, head of European equity strategy at HSBC.The European equity market saw the least outflows among major economies last week, of $100 million, while the U.S. recorded the biggest outflows, of $9.1 billion, according to Deutsche Bank (ETR:DBKGn).”It’s been a good few months for Europe relative to the U.S., but there is more room for this trade to run over the course of 2023,” said Hugh Gimber, a global market strategist at J.P. Morgan Asset Management.”The attractiveness is not only at the index level but also within sectors as well.”Even though Russia’s year-old invasion of Ukraine sent the cost of natural gas and electricity to record high and pushed the region to the brink of a recession, Europe’s economy is looking a lot less fragile.The winter has been warmer than usual and the region’s gas storage tanks are full. Along with billions of euros in government aid to homes and businesses, the economy has shown resilience. Stoxx v SPX relative outperformance https://fingfx.thomsonreuters.com/gfx/mkt/zgvobnkdjpd/STOXX%20SPX%20RELATIVE.png THE CHINA BOOSTGreater exposure to China at a time when the United States has been trying to reduce its dependence on the world’s second largest economy has also helped Europe’s automakers, miners and luxury companies. Exports from the eurozone to China account for about 3% of the region’s total GDP and 3.5% of Germany’s output, according to Barclays (LON:BARC).The Paris stock market, which houses premier luxury names including LVMH, Kering (EPA:PRTP) and Hermes International (OTC:HESAF), has benefited more from China demand as its economy emerges from a strict pandemic-related lockdown. “We are starting to turn more positive on consumer discretionary,” said Laura Cooper, senior macro strategist at BlackRock (NYSE:BLK).France’s blue-chip index hit a record high earlier this month, while London’s FTSE 100 recently notched a string of all-time highs. “The resilience of the consumer is evident with the recent economic data, and largely in Europe over the U.S. because we’re starting to see deterioration in some of the consumer gauges in the U.S.,” Cooper said.CHEAPER IN EUROPEOn the valuation front too, the European stock market is much cheaper than the U.S. The STOXX 600 trades at about 13 times its 12-month forward price-to-earnings ratio, while the S&P 500 trades at some 18 times.”Europe remains cheap compared to their U.S. counterparts but this, at least at the index level, has a lot to do with sector composition,” said Julien Lafargue, chief market strategist at Barclays Private Bank.Despite this advantage, it is yet to be seen if the outperformance by European markets will be sustained long term. A Reuters poll found that analysts and strategists were cautious on European shares and expect the STOXX 600 to fall slightly in 2023 against the backdrop of a likely cut to earnings and doubts over the outlook for monetary policy. “In addition, what drives long-term performance is not valuations but earnings. And on that front, we see no reason to believe that there has been a paradigm shift in favour of Europe,” Lafargue said. More

Rishi Sunak will on Monday claim he has negotiated “fundamental” changes to the post-Brexit trading regime in Northern Ireland as he seeks to end a bitter row that has overshadowed UK ties with the EU.The British prime minister and Ursula von der Leyen, the European Commission president, are expected to seal the deal to reform the so-called Northern Ireland protocol at Windsor after months of diplomacy.Von der Leyen will also separately meet King Charles, adding a sense of occasion to what UK insiders are dubbing the “Windsor agreement”. Sunak hopes the deal will be a watershed moment in UK-EU relations.Sunak will then begin the daunting task of selling the reforms to pro-Brexit Tory MPs and to Northern Ireland’s Democratic Unionist party, with a statement to parliament scheduled for Monday afternoon.British officials claim Sunak has secured “fundamental” reforms to the protocol, part of Boris Johnson’s 2019 Brexit deal.They say the agreement will fix concerns over trade friction on goods travelling between Great Britain and Northern Ireland and what local politicians have called a “democratic deficit”, giving them a say over new EU rules in the region.Two people with knowledge of the deal have said that the revised settlement, which runs to more than 100 pages, is an “implementation agreement”.Brussels will have to make some changes to existing EU law — as it did last year to resolve an issue over access to generic medicines for Northern Ireland — in order to give effect to the changes. “It’s a fix that will allow the EU to say ‘we haven’t reopened the text of the deal’, but the UK can say ‘we’ve won material legal changes to the package’,” one insider said.Among the expected changes is a derogation on pet passports that will enable UK residents to take their dogs to Northern Ireland without microchips and pet passports as if they were travelling to the EU, as currently required.The EU is also expected to soften its stance in other areas of contention that make Northern Ireland residents feel their place in the UK’s internal market is being constrained — for example, around receiving parcels from Great Britain by post.Another area that officials are confident will be resolved is a spat over steel quotas that led to HM Revenue & Customs warning UK producers last August that some steel products would be required to pay 25 per cent tariffs when shipped to Northern Ireland.The UK decision to provide full data transparency to the EU, alongside building border control posts at Northern Irish ports, is expected to unlock a radical simplification of the processes needed for Great Britain traders to send products to Northern Ireland.It is anticipated that those who register products via a trusted trader scheme and label products for consumption “NI-Only” will not be required to present full customs and animal-health certification at the border, although full details of the scheme have yet to emerge.The UK will say the package represents a significant improvement in the functioning of the trade border in the Irish Sea that Johnson agreed as part of the original Northern Ireland protocol deal in 2019.More problematic for Sunak may be convincing the DUP and hardline Brexiters in his own party that the deal addresses the constitutional issues thrown up by the protocol.Officials conceded that the agreement would not remove EU law or European Court of Justice jurisdiction from Northern Ireland, which remains part of the single market for goods, as demanded by Brexit hardliners.Insiders on both sides indicated that Brussels had not moved substantially on the role of the ECJ in enforcing the protocol, although the UK is expected to argue that the amount of EU law being enforced will effectively have been reduced.Nor will the deal meet the DUP’s recent demand for a dual regulatory regime in the region, with producers able to choose to apply UK standards, rather than EU rules, for exports into the British market.The protocol also requires the UK to refer subsidy or “state aid” decisions that might affect the Northern Ireland goods trade market to Brussels. The insiders indicated this would remain, but that only the largest decisions required referral.

The deal is also expected to include a system to significantly improve the level of consultation with the Northern Ireland assembly about new EU rules and regulations applying in the region. However, the consultative mechanism, which is expected to be similar to the one enjoyed by Norway as part of its deal to implement EU single market legislation, will not amount to a veto. Sunak hopes the deal will eventually persuade the DUP to rejoin the Stormont power-sharing executive, which it is boycotting in protest at the operation of the protocol.But the prime minister is also targeting a much bigger prize of improved relations with the EU, including on scientific collaboration, and warmer ties with US president Joe Biden, who has expressed concerns about the stand-off over the Northern Ireland issue.

Video: The Brexit effect: how leaving the EU hit the UK More

LONDON (Reuters) – Central banks need to “get the job done” when it comes to getting inflation back under control, the Bank for International Settlements has said, urging them to avoid the mistakes of the 1970’s by declaring victory too early.The BIS, dubbed the bank for central banks, said it was vital authorities didn’t repeat the stop-start cycles of the 1970s when interest rates had to be hiked to painfully high levels after attempts to lower them resulted in an inflation surge.”Central banks have been very, very clear that at this stage the most important aspect is to get the job done,” the head of the BIS’ Monetary and Economic Department, Claudio Borio, said as part of a quarterly report. “A cautious attitude designed to make sure that one is not declaring victory too early is the appropriate one”.Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve has lifted U.S. rates 450 basis points from near zero, the European Central Bank has hiked the euro zone’s by 300 bps and other parts of Europe and many developing economies have done even more.There are concerns, however, that though inflation in many major economies is beginning to come down, it will remain stubbornly high due to volatile energy and food prices, as China’s economy reopens and as workers demand higher wages.Data on Friday showed U.S. consumer spending increased by the most in nearly two years in January amid a surge in wage gains, adding to the view among economists that the Fed will continue raising its rates well above 5% this year.In Europe too, the ECB is expected to extend what is already its steepest-ever streak of rate hikes next month with another 50 basis points hike that would take its key rate to 3%.”What you don’t want to do at all costs is to repeat the stop-go policies of the 1970s when you are reversing (rates) and you then realise that the job has not been done,” Borio said. “Then you have to go back and forth.”The BIS’ report also included research showing that rate rises are more likely to cause financial system stress when private debt levels are high, although tougher “prudential policies” can reduce the risk and give central banks more room for manoeuvre.Another section looks at how higher commodity prices and the U.S. dollar exchange rate significantly affects the risk of stagflation – weak growth and high inflation – especially in developing market economies. The race to raise rates https://www.reuters.com/graphics/CANADA-CENBANK/zjpqjwaolvx/chart.png More

Central banks will keep borrowing costs high for long enough to ensure that inflation is brought under lasting control, the Bank for International Settlements has said, as it warned investors were overestimating the chances of rate cuts next year. “Central banks have been very clear about the priority of getting the job done and of being cautious about declaring victory too early,” said Claudio Borio, head of the monetary and economic department at the BIS. “[This] cautious attitude is the appropriate one.”The BIS said the pricing of financial assets still signalled a “firm expectation” among investors “that rate hikes would stop before the end of this year and that policy rates would decline materially in 2024”.This was in “sharp contrast” to cautious communications from rate-setters, which “gave no indication that easing was on the horizon”.The message from the quarterly bulletin of the BIS, often referred to as the central bankers’ bank, comes as investors become increasingly nervous that rate-setters will raise borrowing costs to higher levels than they hoped — and keep them there for longer than expected. Market expectations earlier this year were for the US Federal Reserve, which has raised rates by 4 percentage points since last March, to begin cutting rates before the end of 2023 or early in 2024. This view has been challenged in recent weeks by higher than expected US inflation figures and strong jobs data. A rally in global bond markets earlier this year has crumbled, while stocks have fallen sharply. In the eurozone, where the European Central Bank has raised rates by 3 percentage points since last summer, investors have started pricing in more rate rises over the coming months. While headline inflation rates have fallen since the autumn on the back of a fall in commodity prices, cost pressures remain far higher than rate-setters would like. Annual price growth remains several multiples higher than central banks’ 2 per cent goals. In the eurozone, core inflation — which strips out changes in food and energy prices, and is seen as a better measure of underlying price pressures — hit a fresh record high of 5.3 per cent in January.

Borio said it was “much easier to get inflation from 8 per cent to 4 per cent when the work is done by [falling] commodities prices, than it is to get it from 4 per cent to 2 per cent, which is the part that central banks will have to do”. Hyun Song Shin, the BIS’s head of research, said the lesson of the high inflation of the 1970s was that price pressures could rise again after falling as new shocks materialise. “The reason central banks have been emphasising [the importance of] going the last mile on bringing inflation down is that, if you are not fully back to target and relax too early, you will undo all the work you have done before,” he said.He added that there was evidence that consumer demand had become less sensitive to changes in central bank policy rates, making the job of bringing inflation under control harder. More