SocGen Asks: ‘Will Euro Strength Kill The Eurozone Profit Recovery?’

Ok, well one thing we’ve been pounding the table on for a week is the extent to which excessive (whatever “excessive” means in this context) euro strength will undercut the bull thesis for European stocks.

This dynamic was on display on Friday and then again Monday morning, as a soaring single currency added to the downward pressure exerted by mushrooming reports of German automaker collusion (full story here).

The going narrative is that the trend of European equity underperformance has reversed…

EuroStoxx

(Goldman)

…but it seems likely that could change if this continues…

EURUSD

This is the subject of the latest note from SocGen’s Andrew Lapthorne, whose commentary can be found excerpted below…

Via SocGen 

Europe was the standout region last week, with losses across most countries with the exception of The UK, Norway and The Netherlands. MSCI Eurozone lost 2.0% during the week, nearly all accounted for by the strengthening euro. In US dollar terms the index was down just 0.2%. This year has again been all about getting the currency calls correct, and to a large extent the gains in the Eurozone this year have been largely down to the appreciating euro. The same could be said of EM versus DM, with the US dollar weakness giving a fillip to Emerging Markets this year, confounding expectations for a stronger US currency.

Currency moves also make the latest reporting season worth watching (most of the time the consensus has been so manipulated as to make any negatives or surprises largely meaningless), as in theory US companies should experience a significant tailwind from US dollar depreciation this year, while Eurozone companies should experience considerable headwinds.

Consensus 2017 EPS expectations for the Eurozone have been on a gentle rise throughout most of this year and had been revised up for eight months in a row, the longest period of upgrades since 2006.

A result 2017 EPS expectations are 1.7% higher than where they were last October. This compares with the US where the S&P 500 has seen 2017 EPS expectations cut by 1.7% over the same period.

However this period of relative Eurozone earnings outperformance came to an end last month, forecasts were cut and the latest ratio of upgrades as a % of total estimate changes has slumped to 43%, a level consistent with low single digit growth rates not the double-digit rate many are hoping for this year. Now one data point is largely meaningless and as ever there is an element of pre-positioning of EPS forecasts prior to reporting (though this is less common in Europe than in the US), but it makes for an interesting week with so many European companies reporting.

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