European
shares,
already
trading
near
record
levels,
only
took
a
brief
dent
when
the
ECB
released
cautious
comments
on
inflation
and
its
expected
rate
cut
trajectory
on
Thursday.
The
central
bank
had
just
cut
interest
rates,
as
widely
expected,
and
traders
were
focusing
on
cues
about
how
many
more
rate
cuts
to
expect
in
2024.
The
ECB’s
raised
inflation
forecast
cooled
hopes
for
a
further
cut
in
July,
which
markets
had
already
assigned
a
low
likelihood
of
about
10%
before
the
announcement.
Throughout
the
central
bank’s
initial
statement
and
subsequent
press
conference,
President
Christine
Lagarde
refused
to
say
whether
the
institution
had
embarked
on
a
rate-cutting
trajectory
for
the
remainder
of
the
year.
For
Michael
Field,
European
markets
strategist
at
Morningstar,
“the
question
of
whether
further
rate
cuts
will
follow
in
2024
is
still
open
to
debate.
Most
economists
think
so.
I
would
tend
to
agree,
inflation
has
come
down
enough
to
justify
it,
and
interest
rates
at
current
levels
give
the
ECB
plenty
of
room
to
cut
without
fear
of
a
resurgence
of
inflation,”
he
explains.
Why
are
European
equities
near
record
levels?
Between
the
start
of
the
year
and
the
time
the
ECB
started
cutting
rates,
European
equity
markets
had
risen
by
almost
9%.
This
rise
can
be
explained
by
earnings
estimates
for
European
equities,
which
have
been
revised
upwards
by
2.8%
since
the
start
of
the
year,
and
the
appreciation
of
the
valuation
multiple
(P/E),
which
has
risen
from
13x
to
13.8x.
At
this
level,
it
is
slightly
below
its
historical
average
of
14x.
“Historically,
European
equity
markets
were
up
in
9
out
of
11
cases
12
months
after
the
first
cut
and
on
average
by
20%,”
Deutsche
Bank
strategists
commented
on
Friday.
“Different
to
today,
most
of
the
past
cutting
cycles
started
while
the
economy
was
in
a
recession.
This
time
around,
markets
are
enjoying
the
benefit
of
rate
cuts
while
economic
growth
is
picking
up
and
inflation
has
normalized
–
a
Goldilocks
scenario.”
BDL
Capital
Management
fund
manager
Laurent
Chaudeurge
also
sees
further
upside
if
economic
trends
persist:
“The
feedback
we’re
getting
from
companies
shows
that
last
year’s
destocking
movement
is
over.
Results
for
the
second
quarter
of
2024
were
better
than
those
for
the
first,
but
we
haven’t
yet
seen
a
very
marked
recovery,”
he
told
Morningstar
over
the
phone
on
Friday.
“We
therefore
need
the
second
half
of
the
year
to
validate
this
recovery,
and
for
earnings
to
continue
to
grow
in
the
second
half,
which
should
benefit
from
a
favourable
basis
of
comparison
with
the
second
half
of
2023.”
Which
sectors
could
benefit
from
further
rate
cuts?
To
answer
this
question,
the
recent
sectoral
performances
of
the
European
equity
markets
may
give
an
indication,
since
Thursday’s
rate
cut
was
already
priced
into
valuations.
Among
the
sectors
that
have
gained
the
most
this
year
are
financials
and
telecoms,
which
are
more
sensitive
to
rate
cuts,
but
also
technology
and
industrial
stocks,
which
are
more
sensitive
to
the
outlook
for
economic
growth.
“The
prospect
of
a
more
favourable
macro
environment
should
benefit
equities
in
general,
and
cyclical
sectors
such
as
industrials
in
particular,”
Julius
Baer
strategist
Mathieu
Racheter
and
analyst
Christian
Gattiker
wrote
in
a
May
31
note.
Deutsche
Bank’s
strategists
favour
Basic
Resources
and
Chemicals
stocks,
which
“still
leave
potential
for
further
upside
due
to
improving
global
manufacturing
activity.”
Meanwhile,
“Staples
and
Residential
Real
Estate
offer
the
biggest
upside”
with
regards
to
interest
rate
sensitivity.
Why
didn’t
equities
jump
after
Thursday’s
rate
cut?
“Clearly,
a
cut
of
25
basis
points
is
not
enough
to
move
the
needle
on
economic
growth,
or
even
to
materially
reduce
debt
servicing
costs
for
European-based
companies,”
says
Morningstar’s
Michael
Field.
“That
said,
this
cut
is
symbolic
of
a
change
of
direction
on
the
part
of
the
ECB.
The
idea
of
returning
to
a
more
normalised
interest
rate
environment,
where
base
rates
stabilise
at
something
like
2%,
is
enough
to
excite
equity
markets.”
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