Waning Europe Stock Trade Gets Shot in Arm From Bond Selloff

This month’s bond rout is reviving a trade that dominated European equities at the end of last year.

Just as they did in the aftermath of the U.S. election, investors are switching into stocks most geared to benefit from a pickup in economic growth and borrowing costs and deserting those deemed less sensitive. This time, it’s European debt yields that are providing the spark. Banks and mining shares are leading the rally, while health care and telecoms are trailing as their dividend payouts become less attractive.

While reflation bets spurred a violent rotation into cyclical shares and out of defensives after Donald Trump’s presidential win, it petered out in 2017 as political scandals engulfed his administration. In Europe, the trade is back in vogue as Germany’s benchmark debt yield hovers near an 18-month high. Banks, insurers and commodity-linked stocks will benefit most from the impetus provided by the bond market, say Societe Generale SA’s strategists. Among the buyers are NN Investment Partners and Carmignac Gestion.

“Cyclical stocks are poised to take their revenge on growth stocks”, said Frederic Leroux, a money manager at Carmignac Gestion in Paris. His firm oversees the equivalent of $68 billion.

Even as U.S. Treasuries rose last week after Janet Yellen signaled the Federal Reserve won’t rush to reduce its balance sheet, the relief didn’t quite extend to German bunds that suffered a blow earlier this month. Members of the European Central Bank next meet on July 20 to discuss how and when to tweak monetary policy, as economic data show the region’s recovery is accelerating.

Miners in the Stoxx Europe 600 Index on Monday extended their winning streak to a sixth day, boosted by better-than-estimated Chinese economic data. They are among the best performers in July, as are banks.

Banks are rallying on the prospect that their lending businesses will turn more profitable. Given that they are the biggest industry group on the Stoxx 600, that’s good news for the broader market. Lenders and insurers make up half of the top 10 contributors to gains on the gauge this month.

A $953 million exchange-traded fund tracking European banks is continuing to attract interest after its biggest weekly inflows in a year. Investors sent money into the ETF for 10 straight days through Thursday, data compiled by Bloomberg show. Globally, funds focused on financial stocks are on pace for their best inflows since the global financial crisis, according to Bank of America Corp.

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