Europe seems to be doing well - BBH

The research team at BBH explains that Europe seems to be doing well as the populist-nationalist threat has been turned back.  

Key Quotes

“The French 10-year premium had risen to nearly 70 bp over Germany.  It stands near 46 bp now, just above the top of the 20-40 bp range seen over the past couple of years.  Before the Great Financial Crisis, there was often no premium.”

“The Eurozone economy is doing well.  Growth is steady at levels understood to be above trend, which means output gaps are closing.  The optimism is not just being expressed by creditors like Germany and Austria, but by the head of the ECB.  Draghi has been sounding increasingly confident that the expansion is broadening and deepening, and becoming more resilient.  Even if this week's flash PMI readings pull back a little, as the many expect, barring a significant surprise, they will remain above the Q1 average.”

“There is some risk the market gets ahead of itself.  The economic improvement is a necessary but insufficient condition to exit the unorthodox monetary policies.  Inflation is key.  A change in the risk assessment to a more balanced setting or an acknowledgment that interest rates are not going to be cut further would merely confirm what investors already know.  Meanwhile, speculative sentiment has swung sharply in favor of the euro and Europe.  Speculators in the futures market are net long euros for the first time in three years.”

“Many of the major houses have been touting the attractiveness of European equities.  The NASDAQ has held its own (13% year-to-date), but the S&P 500 (6.4%) has underperformed the major European markets (France 9.5%, Germany 10.1%, Italy 12.1%, and Spain 15.9%).  Many investors would be content with these returns for the entire year, rather than five and a half months.”

“It is fine and good that France has elected a new president and there appears to be a potential political realignment.  It too may be necessary but ultimately insufficient.  The goods still must be delivered.  France needs to get its economic house in order before its leadership in Europe can be taken seriously.  The solution to France's pressing problem are not to be in Brussels or treaty changes, but in structural reforms.”