The euro’s nosedive is boosting Eurozone stocks to record levels. Meanwhile, the region’s economy is witnessing the strongest momentum experienced since the economic crisis. Stocks are also surging higher, particularly exporters as the common currency continues to plunge.
Euro’s Continual Slide
On Tuesday, the Euro plunged to its lowest level in almost 12 years. The Euro witnessed another decline of nearly 1.4% against the U.S. dollar to drop to $1.07. The euro declined further to trade below $1.06 on Wednesday, reaching its lowest level since 2003.
Continuous decline in euro raised the possibility that the two currencies are moving toward parity in the not-too-distant future. Concerns that an interest rate hike was in the offing combined with European Central Bank’s (ECB) monetary easing program led to the plunge.
ECB Stimulus
The ECB quantitative easing program that got underway on Monday also weighed on the euro. The program has pushed Eurozone bond yields to their lowest levels ever. Short-term German government bond yields are in negative territory.
The ECB announced a 1 trillion euro ($1.1 trillion) bond-buying program, which started on Mar 9. As announced in January, ECB will buy government bonds worth 60 billion euros a month through a quantitative easing program. The QE program will continue til Sep 2016.
ECB President Mario Draghi said this time that ECB would purchase these bonds even if they have a negative yield. However, the negative yield should not cross -0.2%, as they need to be within the level of ECB's deposit rate.
Fed Rate Hike Fears
Meanwhile, U.S. markets are anticipating that the Fed will consider a rate hike in second half of this year as strong jobs data on domestic front suggested that labor market is improving at an impressive rate.
The recent upbeat jobs data has raised expectations that the Federal Reserve may hike interest rates as early as June, rather than in the third quarter of 2015, as previously estimated. This is especially true as the latest upbeat unemployment rate has hit the upper bound of the 5.2–5.5% range which the Fed believes signals full employment. Also, average hourly wages of $24.78 rose modestly by 3 cents in February though wage growth still remains an area of concern.
Analysts are also expecting that the Fed will start the rate hike process by dropping the ‘patient’ phrase in the upcoming Federal Open Market Committee (FOMC) meeting that is scheduled to happen on Mar 18. The Fed maintained its stance to remain ‘patient’ on rate hike for long time and is expected to change its stance soon.
European Markets Gain
Stocks in Europe surged to a six-week high on Wednesday. Exporters received a significant boost from a falling euro. The Stoxx Europe 600 Index surged 1.5% as automakers emerged as the highest gainers. Germany’s DAX 30 increased 2.7% and France’s CAC 40 increased 2.4% the most among the benchmarks of the 18 markets of West-Europe.
In comparison, the FTSE 100 increased by just 0.3%. Only Greece’s Athex Composite Index lost 2.5%, even as further talks about the fine print of economic reforms commenced in Brussels.
Export-Led Growth
The decline in the euro is particularly beneficial for the region’s economy. This is because nearly 25% of the region’s GDP can be attributed to exports. This is double of how much exports contribute to US’ GDP and even exceeds the proportion of China’s GDP attributable to exports.
Now, earnings are expected to improve, helping markets to move higher. In this scenario, automakers and chemicals companies are the more obvious choices. However, pharmaceuticals and luxury goods stocks are among those set to make steady gains.
There has been a significant decline in what is referred to as the trade-weighted euro. This is the value of the common currency as measured against a basket of currencies with which the region has the highest proportion of trade. This metric has declined 9.2% since January.
A 10% decline on a yearly basis in the trade weighted euro will boost GDP by 0.7%. This is nearly 35% of the decline in oil prices. To date, the euro has declined nearly 13% since last year.
Our Choices
Below we present three stocks which are likely to gain from these trends, each of which also has a favorable Zacks Rank.
NXP Semiconductors NV NXPI is a semiconductor company, based in Eindhoven, the Netherlands. The company designs and manufactures high performance mixed signal semiconductor solutions to meet the requirements of systems and sub-systems in its target markets.
NXP Semiconductors holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 43.2%.The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 18.45.
Actavis plc ACT is a specialty pharmaceutical company engaged in the development, manufacturing, marketing, sale and distribution of generic, branded generic, brand, biosimilar and over-the-counter (OTC) pharmaceutical products.
Actavis holds a Zacks Rank #2 (Buy) and has expected earnings growth of 26.3%. It has a P/E (F1) of 16.28x.
Cimpress N.V. CMPR is an online supplier of high-quality graphic design services and customized printed products to small businesses and consumers. The company provides services to more than 8 million small businesses and consumers per year.
Apart from a Zacks Rank #2 (Buy), Cimpress has expected earnings growth of 54%. It has a P/E (F1) of 24.48x.
The euro’s slide is expected to continue in the days ahead. European companies are expected to gain significantly in this environment. This is why these stocks would make good additions to your portfolio.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment