Strong Euro Is Still Spooking European Stock Traders

ECB's Draghi Says Substantial Accommodation Still Needed

A strong euro still spooks European stock traders, even when Mario Draghi starts talking up the region’s economy.

That’s been the takeaway this week, with the Euro Stoxx 50 Index sliding 2.1 percent as the currency soared toward its highest level since January 2015 after European Central Bank President Draghi said that officials will reassess stimulus in autumn. His remarks on Thursday that the region’s economy is finally enjoying a “robust recovery” and an unchanged quantitative-easing program did little to rein in the moves.

Equity investors are struggling to get used to the prospect of life without the ECB providing a floor to markets. While their reliance on the central bank for cues has eased somewhat -- stocks and the euro are both up for the year -- this week’s moves show Draghi’s words still hold sway. The currency gains put even more pressure on European companies to generate better earnings at home to counter the blow to exporters.

“The market was expecting dovish comments so even a neutral Draghi would inevitably push up the euro,’ said Yogi Dewan, who oversees about $1 billion as the chief executive officer of Hassium Asset Management in Gerrards Cross, U.K. “It added to jitters about whether we’ll get the earnings growth that everyone is hoping for.”

A profit revival after years of stagnation boosted optimism about European stocks in the first half of the year, but the rally has been losing steam since mid-May as the common currency strengthened. While that has helped the equities attract $26 billion this year, the region’s previous false starts are keeping bulls in check.

In 2015, stock funds tracking Europe attracted a whopping $123 billion from investors worldwide only to see a QE-induced rally falter throughout the year. Burnt by such premature optimism, global money managers still hold 4.9 percent of their portfolios in cash, according to a Bank of America Corp. survey this month. That’s far higher than averages going back to 2001.

Separate Ways

The Euro Stoxx 50 is heading for its largest weekly drop in three as the euro strengthened. Coordinated reactions in the two asset classes to the central bank’s policy updates are rare in the era of quantitative easing: Since March 2015, the equity gauge closed higher on an ECB policy decision day only once when the currency gained as much as it did Thursday.

With more than half of the firms on the Euro Stoxx 50 scheduled to release financial results next week, better demand should outweigh a stronger euro, according to Barclays Plc’s William Hobbs. His views diverge from strategists at Goldman Sachs Group Inc., who say European profits may disappoint this season.

“The patient is leaving the emergency room,” said Hobbs, head of investment strategy at Barclays’ wealth-management unit in London. “This should be important for both stocks and the euro. Let’s see what next week brings.”

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