The European Central Bank (ECB) is likely to make some probably very feeble, hawkish noises at its monetary policy meeting tomorrow, and the euro already has appreciated in anticipation. Normally, a strong currency should put foreign investors off the assets denominated in that currency because it costs more in dollars to buy them. But U.S. investors seeking to diversify into Europe should not be put off by the euro's strength.
The single European currency reached its highest level in five and a half months to the U.S. dollar after the result of the first round of the French election showed that centrist, pro-EU Emmanuel Macron made it into the runoff to oppose extremist, anti-EU Marine Le Pen. Investors worried that this outcome means a tightening monetary policy should consider that any ECB tapering of its asset purchases and an eventual increase in interest rates can only happen at a snail's pace. The Federal Reserve is still likely to look more hawkish by comparison.
For those who point to Germans' fondness for higher interest rates as a nation of savers, it is worth remembering that export-driven Germany benefits greatly from a weak euro. So greatly, in fact, that the Trump administration mulled calling it a currency manipulator -- even though Germany has no control over the euro.
For investors, the way to play Europe right now is to keep an eye on what the central bank is up to, but watch the European earnings season with the other one to discover opportunities for further growth.
It is still very early in the European earnings season, but it is shaping up to be one in which positive surprises surpass negative ones. Of 2,860 European companies set to report quarterly earnings in a FactSet database, 243, representing 8.5%, reported earnings so far. Of these, 47% posted positive surprises and 38.5% negative surprises in the first quarter.
Looking at the sectors with most positive surprises, they are: producer manufacturing, finance, technology services, retail trade and consumer durables and non-durables. On the negative surprises side, transportation leads, followed by electronic technology, health technology and communications.
Of course, it is too early to draw meaningful conclusions based on so few companies reporting. Still, one thing that seems to be very positive is that the financial sector, hit by low interest rates, regulatory burdens and legacy bad loans, still manages to surpass expectations.
Perhaps this is because expectations are so low, after years of negative performance. But in an environment of rising interest rates, the first to benefit would be the banks. A rise in yields at the long end of the curve as the ECB tapers its bond buying would improve banks' net interest margins.
The taper shouldn't affect banks too much. Their own bonds did not benefit from the central bank's asset purchasing program, as they were excluded. For the first time in years, investors perhaps could start looking at European banks with hope rather than apprehension.