Equity Market Review: It better end soon

Research evidence excerpt

Equity Market Review: It better end soon

Barclays | Equity Market Review

FIGURE 1. The EU vs US equity trade has very much become a call on FIGURE 2. The gap between falling falling EU PMIs and resilient

the oil price direction earnings is unlikely to sustain for longer if the war doesnt stop soon

Source: Bloomberg, Barclays Research Source: IBES, LSEG Data & Analytics, Bloomberg, Barclays Research

If no peace soon, concerns about an ECB policy mistake may weigh more on eurusd.

Incoming data continues to highlight a widening divergence in activity between the US and

Europe. US data surprises remain firmly positive, while European data continues to

underwhelm, reinforcing a growing gap in economic momentum. Although both regions face

similar concerns around war induced inflation pressures and fiscal trajectory, stronger activity is

somewhat pushing yields higher for 'better' reasons in the US. In contrast in Europe, growth

dynamics are weakening, but they haven't yet put downward pressure on Bund yields given the

prevailing inflation concerns. But if EA growth keeps slowing, the bond market may start to

worry more about the ECB 'making a mistake' and hiking for the 'wrong reason', resulting in a

flattening of the curve. Against this backdrop, our FX colleagues see scope for further USD

appreciation if the situation in the Strait of Hormuz remains unresolved. Positioning in the

dollar has also moderated, providing additional room for upside, while underlying

fundamentals, particularly the divergence in growth and rates, continue to favour hard currency

strength, in their view (see Room for a bigger dollar rally 17 May). For EU equities, a softer euro

environment would help sustain the nascent outperformance of exporters relative to

domestically oriented sectors.