Investors are cautiously optimistic about Europe in 2024. Here's what to watch

Major stock indices in Europe and around the world are off to a more uncertain start to 2024, as they await new rounds of data and signals from monetary policymakers.

Global markets rallied during the final two months of 2023, with bond yields falling on hopes that the Federal Reserve and European Central Bank will begin cutting interest rates in early 2024. The latter has yet to signal any imminent policy easing, even as the market first priced a cut. in March.

Although headline CPI rose in December to 2.9% year-on-year, euro area inflation remains on a generally downward path at both core and headline levels, after slowing more than widely expected in recent months.

“While wage growth remains steady and the labor market resilient, we expect both to ease in 2024 and look for core inflation to reach 2% y/y in [the fourth quarter of 2024]“Much earlier than the ECB had expected,” Goldman Sachs chief European economist Gary Stein said in a note on Friday.

“As a result, we are seeing earlier and faster rate cuts than indicated in recent Board communications.”

The Wall Street giant expects the first rate cut in April, followed by 25 basis point cuts at each meeting until interest rates reach 2.25% in early 2025, meaning six rate cuts totaling 150 basis points in 2024.

Three main factors

These expectations are partly mirrored by Deutsche Bank, which believes that the European economy will begin its transition to expansion in 2024, but “will not reach its new equilibrium.”

“The travel trend is positive. We see the economy starting the year in a moderate/broad recession but growing again by 2H24,” Chief Economist Mark Wall said in a research note on Friday.

“We expect inflation to fall to target quickly as supply shocks dissipate, and for the ECB to begin cutting interest rates quickly.”

But the German lender noted that the structural impacts of the pandemic, the war between Russia and Ukraine, geopolitics, climate change and the green transition remain uncertain in the medium and long term, limiting the visibility of the growth and inflation path beyond this year.

Deutsche Bank economists highlighted three key factors that will influence the course of the economy and markets: monetary transfer, the labor market, and competitiveness.

Wall noted that there are some indications that the transmission of monetary policy to domestic banks is “beginning to peak,” but noted that there are other factors adding to the uncertainty in this assessment.

“Whether job hoarding is strong or weak will likely determine whether the labor market is likely to be a drag on growth or an increase in inflation — we think the former more than the latter,” Wall said.

“Competitiveness has fallen to all-time lows even though gas prices have cushioned much of the invasion shock. This reveals a complex and wide-ranging sustainability problem.”

He added that the 2024 elections will determine how government policy responds to this impasse.

“Expanding stock returns”

The rise in risk assets in the fourth quarter moved European stock markets from “oversold to overbought” and shifted sentiment from “depression in October to euphoria by the end of the year,” according to European equity strategists at Barclays.

“In the short term, markets could benefit from some healthy strengthening, but given the growing acceptance of a soft landing, the likelihood of interest rate cuts in 2024 (more in the EU than the US), as well as dovish overall attitudes, we feel the overall trend.” Market travel remains on the upside through 2024, Emmanuel Cao, head of European equity strategy at Barclays, and his team said in a note on Friday.

“The styles that should continue to benefit from the soft landing that materializes, and the consequent expansion of equity returns, are value and size (small caps), and we maintain our positive view on both.”

The British bank maintains a neutral view on quality and growth stocks, which its strategists see as expensive but with the potential to benefit from lower yields.