To The Moon

While much of the return this year is being made by U.S. tech companies, several European indices are at or near all-time highs. There are several explanations for this. For one, the banking crisis seems to be primarily an American problem after all (Credit Suisse had major problems even before the banking crisis) and this is then combined with the debt ceiling crisis, another typical American problem. Moreover, European equities are relatively cheap.

The euro has also been able to gain some value against the dollar although the scope for a continuation there seems limited. Then, of course, there is a remarkable drop in gas prices, now some 90 percent below their August peak. Last year everyone still assumed that such high energy prices would inevitably push Europe into recession, but the big surprise this year is that recession is momentarily out of the picture. But there is more. For example, the Italians are using part of the corona grant program to subsidize the preservation of homes, and a subsidy of as much as 110 percent is making construction in Italy busy as well. The Italian right-wing government is a big windfall for the European Union; instead of an Italexit, Italian politicians are ensuring that nothing can jeopardize the large European subsidies. Furthermore, Europe is much more economically dependent on China than the United States and thus Europe - Germany in the lead - is also benefiting from the recovery of the Chinese economy. In fact, many international investors would rather buy French luxury goods manufacturers than Chinese stocks, even though the reason these companies are performing well is mostly a result of Chinese consumer demand.

Furthermore, for Europe, the basis of comparison with last year is relatively favourable. Especially the war in Ukraine and the accompanying rising energy prices chopped into it quite a bit. In this respect, it is not so strange to grow on an annual basis. The European Commission is now counting on 0.8 to 0.9 percent growth this year. Inflation does remain more persistent in Europe than in the United States. This is primarily because governments here have a greater influence on inflation.

Furthermore, actual inflation is not always properly measured either. For example, CBS will adjust its figure because of the large difference between new and existing energy contracts. Also, the various packages to compensate citizens for high inflation rates are not included in the inflation figure. Thus, inflation figures do not give a good picture of the actual development of purchasing power.

Wages are also rising faster here than in the United States, even though the labour market there is tighter. The ECB wants to fight that inflation and in the meantime is being helped by sharply lower energy prices. The ECB is expected to raise interest rates two more times, but will then stop at 3.75 percent. One caveat, however, is developments in the U.S. There the market is counting on an interest rate cut in July. If that actually comes, it is possible that the ECB will pause earlier. A scenario in which the ECB will raise interest rates and at the same time the Fed will cut rates is not so likely.

In the somewhat longer term, the European economy is not in such good shape. The euro system is creating an ever-increasing divergence. The Italians have every reason to leave the euro. The economy has not grown on balance due to the many recessions since the introduction of the euro. The debts did, and they have now reached a level where several years of reflation are required to bring the ratios back somewhat in order.

Furthermore, from now on we are cut off from Russian energy. This also means that the Russians will no longer reinvest the proceeds in the Eurozone. From now on we have to buy energy in hard dollars. We have to earn those dollars first, while energy is still relatively expensive here, as is the labour factor. Furthermore, there is a risk that not only the Russians but also the Arabs and the Chinese will be reluctant to invest in the Eurozone. After all, what happened to the Russians could also happen to the Arabs and the Chinese. If so, the long-term fundamentals of several Asian markets are much better.