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CoreMacro | Europe
Europe-focused research - including in-depth country reports. Typically published twice a month.
The near-term outlook is less supportive for European banks and defense equities. We downgrade banks to neutral and continue to expect defense stocks to trade in a “sell the rumor, buy the news” pattern.
The ECB is about to make its first policy mistake in the current cycle by being complacent about the downside risks to inflation. The confluence of base effects, a stronger euro, food and energy deflation, and rapid services disinflation will push headline inflation closer to 1% in the first half of the year. This significant undershoot will force the ECB to deliver reflationary cuts. Go long the September 2026 3-month Euribor futures and tactically reduce exposure to inflation-linked bonds in the Eurozone.
This week’s central bank meetings are a good reminder that monetary policy can still surprise. The Bank of England sounded more dovish, and the European Central Bank sounded complacent about the inflation undershoot. Meanwhile, the Reserve Bank of Australia hiked rates earlier this week. Investors should remain overweight UK Gilts, position for more ECB easing by going long the September 2026 3-month Euribor futures, and fade further rate hikes priced in Australia.
US Treasury yields require a higher premium for both geopolitical risk and inflation risk, but higher bond yields are not necessarily bad for stocks.
Europe is in a geopolitical sweet spot. Exaggerated fears of Russian military aggression and abandonment by the United States, as well as increased competition from China, create a geopolitical imperative to stimulate, reflate, and reform. Taken together with fading cyclical headwinds, it suggests that European risk assets can continue to outperform US ones on a cyclical investment time horizon. Remain long European stocks, in particular industrials, and EUR/USD.
Europe is not left out of the AI race. Despite lagging US and China in LLMs and AI capex, Europe is quietly making progress where it matters, including industrial adoption. European capitals and the EU seem committed to not let that technology slip away, and are investing to support a “second-wave” role in AI. Scaling remains uneven, especially for SMEs, but will not prevent productivity gains in the region.