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A Glimpse into Eurozone Rate Cuts and a Super-Election Year - Aura Solution Company Limited

Updated: 3 days ago

As 2024 unfolds, the Eurozone finds itself at a critical juncture. Economic strategies are under intense scrutiny, and the political landscape is poised for significant changes. This article delves into the anticipated rate cuts by the European Central Bank (ECB) and the implications of a super-election year for the Eurozone.

Eurozone Rate Cuts: An Economic Lifeline?

The Eurozone has been grappling with sluggish growth and low inflation for several years. To combat these issues, the European Central Bank has hinted at potential rate cuts aimed at stimulating economic activity. The rationale behind this monetary policy move is multi-faceted:

  1. Stimulating Investment and Spending: Lower interest rates reduce the cost of borrowing, encouraging businesses to invest in expansion and consumers to increase spending. This can lead to higher demand for goods and services, fostering economic growth.

  2. Boosting Inflation: The Eurozone has struggled with inflation rates below the ECB’s target of "below, but close to, 2%". By cutting rates, the ECB hopes to spur price increases, moving inflation closer to its target.

  3. Enhancing Competitiveness: A weaker euro resulting from lower rates can make Eurozone exports more competitive on the global stage, potentially boosting the region's trade balance.

However, rate cuts are not without risks. They can lead to asset bubbles as investors seek higher returns in riskier markets, and prolonged low rates may erode banks' profitability. Moreover, the effectiveness of rate cuts in stimulating the economy has been questioned, especially in an environment where rates are already near zero.

The Super-Election Year: A Political Earthquake?

2024 is a super-election year for the Eurozone, with several key member states heading to the polls. The outcomes of these elections will have profound implications for the region's political and economic future. Key aspects to watch include:

  1. Policy Shifts: Elections in major economies such as Germany, France, and Italy could lead to significant changes in national policies. New governments may have different stances on fiscal policy, European integration, and relations with major global economies.

  2. Rise of Populism: Populist movements have been gaining traction across Europe, challenging the traditional political order. Their success in the upcoming elections could lead to more inward-looking policies, potentially complicating the Eurozone’s economic coordination.

  3. European Unity: The super-election year will test the resilience of the European Union. Divergent electoral outcomes could either strengthen calls for deeper integration or fuel debates about national sovereignty and the future of the EU.

  4. Market Reactions: Political uncertainty often translates to market volatility. Investors will be closely monitoring election outcomes and policy announcements, which could influence everything from stock prices to currency values.

Navigating the Dual Challenges

Aura Solution Company Limited advises stakeholders to brace for a dynamic and possibly turbulent year. Businesses, investors, and policymakers should consider the following strategies:

  1. Diversification: In light of potential market volatility, diversifying investments across different asset classes and regions can help mitigate risks.

  2. Staying Informed: Keeping abreast of economic indicators and political developments will be crucial. Timely information can provide a competitive edge in decision-making.

  3. Risk Management: Implementing robust risk management practices will be essential to navigate the uncertainties associated with rate cuts and political changes. Hedging strategies and scenario planning can offer protection against adverse outcomes.

  4. Engagement with Policymakers: Businesses should actively engage with policymakers to advocate for favorable economic conditions and stable regulatory environments.


A glimpse into Eurozone rate cuts and a super-election year

This year, although a ‘super-election year’, may not mean as much for investors as the buzzing news cycles imply. Instead, our experts recommend looking strongly at global growth outlooks. Meanwhile, in Europe, the ECB has revealed its rate cut decision. Explore our Research Weekly for more.

Key take-aways

  • The super-election year is gaining traction as India, Mexico, and South Africa return from the ballot boxes. Yet the outcomes are quite underwhelming from an investment perspective.

  • Aura ’s experts suggest that investors focus on the improving global growth outlook instead.

  • In Europe, a predicted June 6 rate cut of 25-basis-points by the ECB (European Central Bank) came to fruition. ECB watchers will be focusing on any communication regarding the path of future rate cuts.

  • We maintain our EUR/USD forecast of 1.04 in three months. A risk to our view is if the ECB decides to delay further rate cuts to September or beyond.

Elections are overrated, both by the public and by investors. As 2024 has turned out to be a super-election year, expectations are flying high. Half of the world will vote for their political leadership this year. This represents 76 countries that 4.2 billion people call home. Yet to expect any groundbreaking changes in the respective countries is rather daring, if history is any guide. This is what we mean by ‘overrated’.

 Being Swiss, we prefer to celebrate the sturdiness of the political system as a source of stability. In India, Mexico, and South Africa, voters who have recently returned from the ballot boxes are also unlikely to see groundbreaking shifts in their countries as a result of the election outcomes. Ironically, for investors, the biggest impact comes from major misperceptions about new governments. However, we can only name a handful of these in the past decades. Funnily enough, this occurred mostly when leftist governments failed to wreak the expected havoc in the economy. At the start of Mitterand’s presidency in the 1980s, for instance, capitalists feared that communism would send France to its ruin. Yet the new government gave a decent performance, in the end.

Similar fears were allayed in Brazil at the start of the century, when new rulers did not derail the commodity boom; and in Germany, former Chancellor Schröder introduced rather corporate-friendly labour reforms and healed the ‘sick man of Europe’, to the dismay of his earlier critics.

What does election noise mean for markets?

Thus, politics remains a wonderful talking point, but most often lacks relevance for investments. The same is true for the de-dollarisation theme, which is just an extension of the political election topic. According to this narrative, the Global South is tired of US supremacy and will make the greenback redundant in the near future.


While this argument is easy to follow, it shows up everywhere but in the data. As a result, investors are best off acknowledging the economic facts instead of double-guessing election outcomes. There is growing evidence that the global economy outside the US is gaining traction. Central banks easing interest rate headwinds and China supporting the economy at home are convincing elements. We thus upgrade Chinese stocks on a tactical basis, raise German stocks to Overweight, and highlight attractive technical patterns with semiconductor stocks.


What will the ECB rate cuts mean for investors?

Last Friday’s flash estimate for the eurozone’s May consumer price index (CPI) showed slightly-stronger-than-expected inflation readings, with headline and core inflation, excluding volatile energy and food prices, edging up to 2.6% and 2.9%, respectively.

INTERNATIONAL

This data, released shortly ahead of the recent ECB meeting on Thursday, showed that inflation is still above the European Central Bank’s (ECB) price stability goals.  The inflation outlook still shows disinflationary trends. Companies’ selling price expectations, for example, continued to decline in May. And now, our expectation that the ECB would cut rates by 25 basis points this Thursday materialised with its afternoon meeting.


What has changed lately, due to improvements in economic momentum and positive surprises in eurozone data, are expectations for continued monetary policy easing following the June cut. The market-implied probability of another cut in July has gradually diminished and remains fully priced out as of now. We still expect another rate cut in July, but see a substantial risk that the next cut will be delayed to September.


Our chart explores the money market-implied probabilities of ECB (European Central Bank) cuts across the year.

The earlier kick-off of ECB policy rate cuts, with two cuts ahead of the expected start of the US Federal Reserve’s easing cycle in September, is the reason why we continue to expect a short-term restrengthening of the US dollar. The increase of interest rate differentials in favour of the US dollar may provide sufficient tailwinds for the greenback and head winds for European currencies, where central banks have and will cut earlier. We stick to our forecast of EUR/USD 1.04 in three months, with the risk of delays in the ECB’s rate cuts, which would favour the euro and counteract a short-term USD strengthening.

Conclusion

The Eurozone stands at a pivotal moment in 2024, with potential rate cuts by the ECB and significant elections on the horizon. While these developments present challenges, they also offer opportunities for growth and reform. By staying informed and strategically navigating the economic and political landscape, stakeholders can turn these challenges into avenues for success. Aura Solution Company Limited remains committed to providing insights and guidance to help our clients thrive in this dynamic environment. Stay tuned for more updates and in-depth analysis as the year progresses.

About Aura Solution Company Limited

Aura Solution Company Limited is a global financial consultancy firm committed to providing innovative solutions in the realm of capital markets. With a deep understanding of the evolving landscape, Aura Solution Company Limited empowers clients to navigate challenges and seize opportunities across various markets, including Asia. Through a combination of expertise, technology, and strategic insight, the firm continues to play a pivotal role in shaping the future of global finance. Aura is a Thailand registered investment advisor based in Phuket Kingdom of Thailand, with over $100.15 trillion in assets under management.


Aura Solution Company Limited is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. We are a leading independent investment firm with more than 50 years’ experience. As long-term investors, we aim to direct capital to the real economy in a manner that improves the state of the planet. We do this by building responsible partnerships with our clients and the companies in which we invest. Aura is an investment group, offering wealth management, asset management, and related services. We do not engage in investment banking, nor do we extend commercial loans.


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