June 23rd, 2025 - The rotation into euro assets can continue.

As we approach the end of the first half, Eurozone equities continue to perform significantly better than their US peers. The region's main benchmark, the Eurostoxx50 is up more than 7% for the year, while the S&P500 is barely positive with about 1% gain. German equities have attracted even more interest and the local index is up by more than 17%, in the same period. And lest we forget, the EUR has appreciated more than 11% against the USD, in a clear sign that global investors have been reducing their US holdings right after Trump came into office in mid-January, in favor of European assets.

Global investors have become skeptical about their over-exposure in the US. The reasons are quite obvious: Trump has started his term attacking everyone (including his own central banker), imposing tariffs on the US's closest allies, flirting with Putin, is pushing for legislation (tax cuts) that has the potential to make the US fiscal situation from bad to worse, and has just launched a war with Iran. His erratic behavior and constant change of mind on very serious economic and geopolitical issues is creating uncertainty among US consumers and businesses, while making the rest of the world uneasy.

And the Eurozone leaders have spotted the opportunity to create the necessary conditions for capital to turn its attention to their region again. According to the Financial Times, a draft EU statement circulated ahead of a leaders’ summit later this month, which asks the bloc’s institutions, including the ECB, “to explore actions to reinforce the international role of the euro”. ECB's President Christine Lagarde wrote in the Financial Times last week that this is “a global euro moment". “Despite a strong aggregate fiscal position, with a debt-to-GDP ratio of 89 per cent compared with 124 per cent in the US — the supply of high-quality safe assets is lagging behind,” Mrs. Lagarde wrote. This came just a few days after the ECB's Chief Economist, Philip Lane said in a speech that the issuance of common bond will be a solution to the "undersupply of safe assets". “There is a great opportunity for the euro to play a bigger role globally,” said IMF managing director Kristalina Georgieva at a meeting of EU finance ministers in Luxembourg just a few days ago, adding: “When I look at the search for quality safe assets, at this point it is facing a constraint on the offering of these assets. It is not by chance that so much now is being parked in gold”. This is no coincidence.

For the moment, the rotation involves primarily European investors who are repatriating part of their investments, rather than US investors switching massively into Europe. It is interesting to note that ownership of US equities by international investors increased from 20-25%, which was the norm for the most part of this century, to a high of 30% in 2024. This increase took place primarily since the pandemic, when US Tech innovation became the dominant theme in markets. We could make the hypothesis that the international ownership of US equities could decline to 24-25% in the coming years, which is at the high end of the pre-2020 range. In this case, there could be 1.8 trillion EUR of outflows from US equity markets and potentially a €1.2 trillion inflow into European equity markets, with significant implications for the performance of the two regions.

US macro data were rather on the weak side last week. May's Retail Sales were worse than expected, they came in at -0.9% vs -0.7% of expectations, but the Control Group (which feeds into GDP) was +0.4% and in line with expectations. Autos, bars and restaurants were the weak spots hurting the headline number, while e-commerce showed some resilience. The June NAHB housing index in the US fell to the lowest level since 2012. In addition, US Housing Starts dropped 10% in May, at the lowest level since June 2020 and  building permits also dropped 2%. Activity seems to have stalled, as buyers have moved to the sidelines due to the combination of high prices and high mortgage rates. Lastly, the weekly jobless claims remained elevated at 250k, matching expectations.

The FED left interest rates unchanged, as widely expected. As we have mentioned several times the US central bank faces significant challenges ahead, at a time when economic growth looks to be slowing down while inflationary pressures might be building up. For this reason it maintained its view that two more rate cuts could be necessary this year, but removed some of the policy accommodation planned for next year. It also downgraded its forecast for economic growth for this year.

The Swiss National Bank decided not to surprise markets, and cut rates to zero. Although negative rates were mentioned in the press conference as a potential tool to fight deflationary pressures and economic slowdown, such scenario has a rather very small probability to happen. The negative effect on Swiss people bank savings as well as other unintended consequences on pension funds and large corporations' cash positions , were also cited as important parameters when deciding going back into negative rates. It seems that managing inflation and growth through the currency is the only tool left for the SNB, which means that the natural force of the CHF to strengthen might be fought by the central bank, despite appearing again on Trump's "currency manipulator" list.

Global equities had another negative week, with US outperforming this time the rest of the world. Investors chose to continue taking profits in Europe ahead of their vacations, leading the regional indices 1% lower on average and have now corrected about 4% from the early-May peak. On the contrary, the S&P500 was flat for the week and has corrected less than 2% from its recent high, which however occurred just two weeks ago. Energy continues to be a bright spot on both sides of the Atlantic as the middle east situation has sparked volatility in oil prices.

Bonds had a stable week, as two opposing forces clash with each other. On one hand the "flight to safety" and the economic slowdown point to lower bond yields (higher prices), but the spike in oil prices (as well as tariffs) point to higher inflation, which is negative for longer term bonds. As a result yields have remained within relative tight ranges. The 10yr US treasury yield remained in the 4.35%-4.45% range, and the German equivalent traded tightly between 2.50% and 2.55%. We would avoid taking bets on higher duration at this stage, unless we see a large spike in long term bonds (over 7 years maturity).

Chart of the Week : Has the dollar entered a new down cycle ?

The above chart compiled by UBS shows the trajectory of the trade-weighted dollar index, for the last 50 years. As can be seen, it tends to move in consecutive up and down cycles which can last 5-10 years with moves of about 45-50% on average from the lows and highs. The last up-cycle seems to have ended in late 2022, when the EURUSD (which comprises almost 50% of this index) fell below parity, close to 0.95. Two and a half years later the dollar has lost about 20% and if history is any guide then we might have entered a long-term down-cycle, which could last for another 4-5 years, at least. According to the average size of the move, the end-target of this down cycle could be a level of EURUSD north of 1.3500. Of course, this is not an official forecast but rather a recognition of a pattern, with no guarantee that the evolution will be the same.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

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• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

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• Sources: Chart of the Week : KSH/FactSet Cover photo: Bennymarty (dreamstime.com)