European equity buyers are showing they don’t require Mario Draghi’s encouragement.
The Stoxx Europe 600 Index rose 0.4 percent, even after the European Central Bank President failed to rein in a euro that advanced beyond $1.20 as he was speaking following the institution’s September meeting. The ECB boosted its 2017 growth forecast to 2.2 percent, the fastest since 2007, as Draghi said economic expansion, which accelerated more than expected in the first half of 2017, continues to be solid and broad-based.
A consensus is building among equity investors that stocks will learn to handle the euro at current levels amid worries its strength will hit exporters’ profits, derailing a long-awaited profit recovery. The currency’s upward trajectory is a result of a better economy, they say, meaning the stock market has the fundamental support needed to perform well.
“Equities are reacting more to the stronger economy than the currency rate — a lot of companies will be able to cope with a euro at $1.20,” said Simon Wiersma, an investment manager at ING Bank NV in Amsterdam. “I can cope with it. Equities can still rise from here, though if the euro trends toward $1.25, it will become a bigger concern.”
Both the euro and euro-area equities rose Thursday, bucking a trend that’s sent the negative correlation between the two to the highest since April 2016.
The euro is the reason European stock funds saw their first outflows in months over the summer amid calls that a $1.20 level is the “pain threshold” for equities. Members of the Stoxx 600 get roughly half their sales from outside the region, according to an estimate by JPMorgan Chase & Co., so their earnings can take a hit from a strong currency.
That looks less likely now. A recent decline in European stocks, which pared their yearly gain to 3.9 percent, has created a buying opportunity, Barclays Plc strategists wrote in a note this week, reiterating their 2017 year-end target of 400 for the Stoxx 600. Analysts still expect members of the gauge to grow profits by about 13 percent this year, according to data compiled by Bloomberg, in line with forecasts in the past few months.
Policy makers maintained asset purchases at 60 billion euros ($72 billion) a month until December, and reiterated their pledge to increase the size or duration if the economy worsens. Now the focus shifts to the institution’s October meeting, when a majority of economists surveyed by Bloomberg expect it to announce changes to its bond-buying program.
Benno Galliker, a trader at Luzerner Kantonalbank in Lucerne, Switzerland, said that while Draghi may have disappointed investors who expected him to address the euro’s strength more explicitly, the long-term trend for stocks remains positive.
“At least he could have tried to influence the currency rates with some words — so there is some disappointment,” Galliker said. “But the underlying economy looks good. Going forward, I still expect a bullish stock market.”
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