LGT Navigator

Economic sentiment brightens slightly in euro area

Editorial note: Due to a holiday weekend, the next edition of the LGT Navigator will be published on Tuesday, 2 April.

The prolonged period of negative sentiment coming out of Europe showed signs of hope on Wednesday with the European Commission’s Economic Sentiment Indicator improving somewhat. Stock markets traded higher Wednesday in Europe and the US as the quarter comes to close at the end of the week, but equities were mixed in Asia on Thursday. Gold remained near all-time highs. Sweden’s Riksbank kept rates unchanged on Wednesday choosing not to follow suit after a surprise cut from the Swiss National Bank a week earlier. The Riksbank did say, however, that a rate cut is possible at its next meeting in May.

Shane Strowmatt, LGT
Temps de lecture
5 minutes
euro banknotes
© Shutterstock

The Economic Sentiment Indicator increased in March for both the EU (+0.7 points to 96.2) and the euro area (+0.8 points to 96.3). The uptick was supported by both manufacturing (+0.3 from February), which has been stuck in a sideways trend for half a year, and services (+0.4). Consumer confidence also continued to recover (+0.6) from a low in late 2022. The mild but broad gains were a positive sign for Europe which has struggled in recent quarters. The euro-area economy just managed to avoid recession at the end of 2023, with gross domestic product flat in the fourth quarter. Markets expect the European Central Bank to begin cutting interest rates at latest by its June meeting in an effort to support the weak economy. The Euro Stoxx 50 closed 0.4% higher on Wednesday.

Despite the positive signals out of Brussels, the bloc’s largest economy, Germany, is expected to only marginally grow this year after contracting over the full year of 2023. The German economy is expected to grow by 0.1% this year, according to a report released Wednesday by a group of economic institutes that advise the German government. German exports are falling in a difficult trade environment, dragged down as Germany’s energy-intensive industries struggle to remain competitive internationally due to comparatively high energy prices among other issues. Germany’s DAX gained 0.5% on Wednesday.

In New York, stock indices had a strong session after three week trading days earlier in the week. The Dow Jones Industrial gained 1.2% and the S&P 500 closed 0.9% higher. The Nasdaq-100 finished Wednesday 0.4% higher. Volatility could pick up in the last two trading session of the quarter as institutional investors look to rebalance positions. In order to remain within allocation limits, institutional investors must rebalance regularly and a strong quarter for equities (the S&P 500 is up about 10% so far this year) means some could be forced to shed stocks at the end of the week.

In the Asia-Pacific region, stock markets were mixed on Thursday. In Tokyo, the Nikkei 225 fell the most among the major equity indices, dropping 1.6%. Japanese stocks were under pressure as speculation was building that the government could intervene in currencies markets to prop up the yen, which was trading at a 34-year low this week. The biggest winner in the region was Australia. The S&P/ASX 200 gained 1% on Thursday, supported by gains in the mining sector. Hong Kong's Hang Seng Index was up 0.9%, while the Shanghai Composite gained 0.3%. In South Korea, the Kospi lost 0.3%.

In currencies, both the Japanese yen and Swiss franc were under scrutiny midweek following interest rate decisions by the countries’ central banks that caught markets by surprise a week earlier. On Wednesday, the yen dropped to a 34-year low after the Bank of Japan ended the world’s last negative interest rate policy last week. The weakness is largely due to market participants’ expectations for interest rates in Japan to remain much lower than in the US, which increases demand for the dollar versus the yen. The yen recovered some ground later on Wednesday after Finance Ministry officials said they are watching the value of the yen and will consider intervening in the currency market if excessive moves look unjustified. In Switzerland - where the Swiss National Bank also took markets by surprise by cutting its key interest rate last week - the franc was heading towards an eighth week of losses versus the euro in a row. The EUR/CHF exchange rate was around 0.98, up from below 0.93 at the start of the year.

Corporate news in focus: There is no major corporate news scheduled today.

Economic data in focus: German retail sales, UK gross domestic product, Switzerland’s KOF Economic Barometer, German unemployment rate, euro zone M3 money supply, Italian Producer Price Index, US gross domestic product, US weekly initial jobless claims, Canadian gross domestic product, University of Michigan Consumer Sentiment Index, US existing home sales.

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
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