Euro-Area Growth Eclipses Currency Jitters for Stock Traders

(Bloomberg) -- The euro is rising again. So what?

Last summer, the single currency flirted with the $1.20 level for a few weeks, sparking worries that it would derail a still-fragile corporate earnings recovery in Europe. Fast forward four months, however, and investors seem to be taking the latest breakout above the “pain threshold” of $1.20 in their stride, with the Euro Stoxx 50 already up 3.2 percent in 2018, enjoying its best start to the year since 2011.

The reason: Europe’s accelerating economic growth is now seen mostly offsetting a stronger euro on companies’ balance sheets. In the latest Bloomberg survey published on Monday, economists raised their 2018 outlook to 2.2 percent, marking the sixth forecast upgrade in the past year.

Earlier this month, figures showed manufacturing PMIs for Germany and the euro area rising to 63.3 and 60.6 respectively, the highest readings since the data series began in 1996.

Growth momentum is the most important driver of aggregate earnings, much more so than swings in the euro, Goldman Sachs Group Inc. strategists including Peter Oppenheimer wrote in a Jan. 4 note.

Goldman estimates that a 1 percentage point increase in gross domestic product weighted according to the sales exposure of European companies -- sales-weighted GDP -- adds 11 percentage points to the earnings growth of Stoxx Europe 600 companies, all else being equal. In contrast, the strategists wrote, a 10 percent rise in the single currency would take only about 1.5 percentage points from earnings growth.

The euro is up about 2.3 percent against the dollar so far in 2018, and a 10 percent rally from last year’s closing level would send it to about $1.32. With cyclical indicators flashing positive, investors are more relaxed about the euro climbing toward $1.23 this week. The negative correlation between the single currency and euro-zone stocks has eased to its lowest level since early August.

With the earnings season about to start in Europe, the economic backdrop is very favorable, Stephane Ekolo, head of global equity strategy at Avalon Capital, said by phone.

“From here, the risk to earnings might not come from the euro, but from an earlier-than-expected end of the European Central Bank’s quantitative easing,” Ekolo said. “That’s where the pain could come from, and is something the market is not pricing at the moment.”

To contact the reporter on this story: Blaise Robinson in Paris at brobinson58@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, John Viljoen, Angela Cullen

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