European stocks have quietly, and rather ironically, been one of the best-performing markets in the world so far this year. I say this because the bloc's political fortunes have simultaneously taken a sharp turn for the worse.
A sampling of recent headlines in The Wall Street Journal: "The Darkening Skies Over Europe's Economy." "Squeezed Between Putin and Trump, Europe Faces a Moment of Truth." "Is Europe Becoming Ungovernable?" And from 2023: "Europeans Are Becoming Poorer. 'Yes, We're All Worse Off'."
And yet Germany's DAX index is up 15% year-to-date, and 33% over the past year. To be sure, that is offset somewhat by the weakening euro. But it's still remarkable for an economy that has been shrinking for the past two years. The French market is up 11% this year. Britain is up 7%. The broad European STOXX 600 keeps hitting new record highs.
Leading the charge this week are European defense stocks, as regional leaders held an emergency meeting in Paris yesterday to chart a course for greater domestic security spending. "There is seriousness now," one official told the Journal. "After 10 years of wake-up calls, the next wake-up call for Europeans may be an air-raid siren."
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And that's because this has all been set off by the potential looming end to the Russia-Ukraine war, in which Europe is not even being given a seat at the table. Russian and U.S. officials are meeting in Saudi Arabia today to determine what a deal could look like, with many Europeans worried the U.S. will capitulate to Russian war gains and leave them vulnerable if Russia were to advance further into Europe.
German military planners, according to the Journal, think Russia could be ready for a broader war against Europe by 2029.
But investors either don't share this anxiety, based on the stock market's big run this year, or think it could actually be a bullish development for European corporates. In other words, they perceive Europe's fortunes right now to be in much better shape than its leaders and the general public do.
Money Report
"I think the strategy of Trump is just to break up Europe," one fund manager (Alessandro Penati of Quaestio) told The New York Times DealBook today, summarizing the bleak mood across much of Europe. "[Trump] has already been very successful in doing that."
And yet, we know how European markets behaved during its euro crisis a decade ago, when "Grexit" became "Brexit" and a broader breakup really did appear to be on the table. There was panic selling, and bond yields soared. The Spanish 10-year yield hit 6%. It's currently at 3.1%. This market behavior is most certainly not acting like a breakup is in the cards.
Not only are stocks rallying, and bond yields staying contained, but one of the biggest problems for Europe since the war on Ukraine broke out--soaring energy prices--are now breaking to the downside. Natural gas prices are down almost 20% in just the past week as peace prospects look more serious. That's a huge tailwind for European corporates, and consumers.
So yes, the bloc might face its biggest existential challenges yet. But markets and investors are giving it plenty of breathing room--and even appear to be betting, for now at least, on success.
See you at 1 p.m!
Kelly
