Euro Equities Shine Under the Xmas Light!
Chart of the Week:
Looking Ahead to 2026: Valuation and Earnings as the Core Anchors
Looking back at 2025, AI development, Trump-era tariffs, and the Fed’s rate cuts were the three dominant market themes. Despite elevated volatility, most equity markets ended the year near record highs. Tech-heavy markets such as Korea, the Philadelphia Semiconductor Index, and Taiwan outperformed. Hong Kong equities also posted strong gains, supported by technology exposure, capital returning to Asia, and a low starting base. Commodities including gold, silver, and copper likewise reached new highs.
Market Recap 1:
Holiday-Thinned Trading Around Christmas and New Year
U.S. 3Q GDP grew 4.3% YoY, beating expectations of 3.3% and the prior 3.8%, driven mainly by consumer spending, which expanded 3.5% and remained a key pillar of growth. However, consumer confidence weakened. The Conference Board’s December Consumer Confidence Index fell to 89.1, below the expected 91, dropping for a fifth straight month and matching the longest decline since the 2008 financial crisis. The data reflect lingering inflation pressure and a soft labor market, leaving future consumption momentum uncertain. With markets closed for Christmas, trading was thin and turnover in both U.S. and Taiwan equities declined.
Market Recap 2:
Weaker USD and Rising Geopolitical Risks Push Gold, Silver, and Copper to New Highs
U.S. November CPI rose 2.7% YoY, below the expected 3.1%. Core CPI increased 2.6%, also under forecasts, suggesting tariff-driven inflation pressure remains manageable. Rates futures indicate the market expects 50 bps of Fed cuts by end-2026, above the 25 bps implied in the dot plot, keeping liquidity loose. The U.S. 10Y yield slipped to 4.13%, with Treasuries moving near flat.
What’s Trending:
Soft Labor Market Pressures the USD; Fed Independence Emerges as Downside Risk
The DXY in December traded slightly below its 200-day average, suggesting fading short-term momentum and a shift toward range-bound trading. With U.S. labor-market data continuing to weaken, the USD may keep softening.
In Focus 1:
Eurozone Earnings Keep Improving; Low-Rate Environment Supports Valuations
Eurozone November CPI eased to 2.1%. A stronger EUR will further suppress core goods prices, and the ECB expects inflation to gradually return toward its 2% target. After cutting the policy rate to 2%, it intends to keep it unchanged—still lower than the U.S. and U.K.—creating a rate environment supportive for economic activity and financial assets. Eurozone 3Q GDP rose 0.3% QoQ, beating expectations. Composite PMI climbed for a sixth straight month to 52.8, a near 30-month high, driven mostly by services, offsetting manufacturing weakness. Real wages remain in positive growth, supporting domestic demand and services activity, with most countries’ services PMIs holding above 50, and Southern Europe performing even better.
In Focus 2:
Tourism Boom Lifts Spain; Services Sector Breaks Out
Eurozone total debt-to-GDP is about 88%, lower than the U.S. and Japan, giving room for fiscal expansion. Germany faces state elections next year, likely pushing the federal government to accelerate fiscal stimulus, providing support for equities. Germany’s current-account surplus relative to GDP outperforms the Eurozone, reflecting stronger fundamentals and supporting a constructive view on German equities. Southern Europe’s current-account surplus-to-GDP ratio has also improved significantly since 2012.
