European bourses are lower in early trading as the euro hits a 23-month high against the U.S. dollar, weighing on shares of European exporters: U.K.'s FTSE -0.8%, Germany's DAX -0.4%, France's CAC -0.2%.
The U.S. Dollar Index dropped 1.4% last week and is down 1.7% this month after touching its lowest level in more than a year; the index currently is up a bit from earlier lows.
"A weaker dollar seems to be the path of least resistance given the soft data coming out of the U.S. and the political uncertainty," says Michael Hewson, chief markets strategist at CMC Capital Markets in London.
Also, euro zone economic data indicates slower growth than expected, as the IHS Markit flash purchasing index for July slips to a six-month low.
Analysts say the weaker PMI is unlikely to signal the start of a sharp slowdown, but the slowing pace of growth and easing price pressures suggest the ECB will be in no rush to taper policy.
Congressional leaders have reached agreement on a set of sweeping sanctions against Russia as punishment for interference in the 2016 U.S. election, engagement in Syria and the annexation of Crimea.
Press Secretary Sanders indicated Pres. Trump likely would support the bill, saying Sunday that original sanctions legislation "was poorly written but... we support where the legislation is now."
Meanwhile, the European Union could retaliate against U.S. sanctions on Russia, worried about potential harm to European energy deals; any significant retaliation would require the support of the EU’s 28 governments, and could face resistance from members such as the U.K. and Hungary.
Mario Draghi and the ECB sounded unexpectedly dovish this week, but that hasn't slowed the major rally in the euro (NYSEARCA:FXE). It jumped more than 1% vs. the dollar yesterday, and is higher by another 0.25% today to $1.661 - up more than a dime since the start of the year, and the strongest since early 2015.
European shares are taking notice, with the Stoxx 600 down 1.2%, led by the Dax's (NYSEARCA:EWG) 1.95% selloff.
The ECB ultimately took little action, but stocks are slipping and bond yields rising after the bank's meeting minutes show policymakers discussing whether to drop their longstanding pledge to expand/extend the QE program.
The policy statement ultimately included a line indicating that rate cuts further into negative territory were unlikely.
Bond yields are pushing sharply higher, led by the Spanish 10-year yield up 13 basis points to 1.676%. The German 10-year Bund is up 9.3 bps to 0.563%.
The euro (NYSEARCA:FXE) is adding to gains, now higher by 0.4% vs. the dollar to $1.1396. The Stoxx 600 is now lower by 1.1%.
Changes may be afoot this year. Overseas funds have attracted more money in 2017 than the U.S. Ex-U.S. funds are also outperforming: The SPY is ahead 6.9% vs. VGK +15.4% and FEZ +16.9%. Outperformance is also being seen in the global EAFE index and in emerging markets.
One obvious explanation is central bank policy - the U.S. tightening while Europe's ultra-ease continues. There's also - dare we say it - green shoots of growth breaking out across the pond. U.S. GDP growth since the crisis has been tepid, but it's topped that of Europe by 9%. This year, Europe's GDP growth is seen at 2% (by the IMF - take it for what it's worth), after a 1.7% performance in 2016 (vs. the U.S. at 1.6%).
Marine Le Pen made it to the runoff round in the French presidential election, but pollsters assure she has no shot at winning the two-person race (set for May 7).
Europe's Stoxx 600 is celebrating, up 2.05%, with France's CAC-40 (NYSEARCA:EWQ) leading the charge with a 4.5% melt-up. Italy (NYSEARCA:EWI) is 4% higher; Spain (NYSEARCA:EWP) 3.3%, Germany (NYSEARCA:EWG) 3%, and the U.K. (NYSEARCA:EWU) 1.8%.
The euro is higher by 1.25% vs. the greenback.
As for bonds, investors are selling the core, and buying the periphery. The German 10-year Bund yield is up 8.6 basis points to 0.341%, while Italian and Spanish 10-year yields are each down about 9 basis points.
The news probably isn't the Stoxx 600 retreating 1.1% today, but that markets have been so good of late that a 1% decline stands as the biggest fall since prior to the election.
All 19 Stoxx 600 sectors fell, with the banks lower by 1.7%.
As for individual countries, Italy (NYSEARCA:EWI) - off 2.95% - led the way down as it works on a bank recapitalization plan. Spain (NYSEARCA:EWP) fell 1.5%, France (NYSEARCA:EWQ) and Germany (NYSEARCA:EWG) 1.1%, and the U.K. (NYSEARCA:EWU) 0.9%.
Europe's managed to put together some gains over the past few sessions, but it was still a down November versus the big post-election rally in the U.S. November's action widened an already large gap between the two markets, with the S&P 500 now higher by 8.8% YTD versus the Stoxx 50's (NYSEARCA:FEZ) 4.6% decline.
The reasons aren't news: Listless economy, struggling banking system, Brexit vote, Spanish vote, Italian referendum.
A snapshot of valuations, though, suggests maybe it's time to allocate a bit more money to EU equities. The Stoxx 600 trades at 14.2 estimated earnings, roughly 15% lower than that of the S&P 500 - the widest gap since 2009.
It's not just valuations, says SocGen's Alan Mudie. Europe, he says, is more levered to what he believes is an improving global economy. That was a curse in a slow 2016, but will be of great benefit in 2017.
The Stoxx 50 (NYSEARCA:FEZ) shed 0.6% today, bringing its weekly loss to just under 4%. Nervousness ahead of next week's U.S. election makes for as good of an excuse as any, but there was also this week's U.K. court ruling which threatens to delay Brexit.
One might think a delay (possibly ultimately leading to a postponement) would be good for Europe, but an argument could also be made it just adds to the uncertainty.