Euro: Growth validation needed for value case – BNY

BNY’s Geoff Yu argues that Euro (EUR) assets show emerging value as the European Central Bank (ECB) holds policy and inflation pressures ease, but stresses that Purchasing Managers’ Index (PMI) data and earnings must confirm stable growth. Yu expects the ECB to stay cautious on further hikes, with low-yielders struggling while high-yield FX retains appeal against stagflation risks.

ECB caution and Euro asset valuation

"Eurozone, European Central Bank, ECB (Thursday, July 23): The Governing Council is no longer showing a unified front on the outlook as more members doubt whether second-round effects are present. However, Bundesbank President Joachim Nagel warned that the current tension in the Strait of Hormuz was essentially a return to March conditions. Vigilance remains, but if the ECB doesn’t signal a clear risk of a severe scenario, the risk of further hikes is low."

"The ECB stays on hold, with lower inflation reducing the urgency around further tightening, but European PMIs now carry the signal. The question is not whether Europe is strong but whether activity is stable enough to support the emerging value case in euro assets."

"The ECB’s communication will remain closely tied to its scenarios. The “severe” scenario remains the tail risk, while the status quo lies somewhere between “mild” and “adverse,” based on the criteria established in March. We see the direction of travel still heading toward “mild,” but it will likely take until September for confirmation as the Governing Council will need to see the next set of forecasts pushing CPI to below 3% for the year."

"If the cost is too high, setting expectations for easing or at least a reversal of the precautionary hike in June is essential. There is a value argument emerging in favor of euro assets, but growth and earnings confirmation is required. Current financial conditions don’t support this case, and we have highlighted in iFlow that Eurozone assets do not face extreme holdings stress."

"We expect European low-yielders to struggle in the current environment. While there is value in high-yield FX and perceived growth assets, it’s difficult to make a strong case for rotation away from APAC and the U.S. until stagflation risk recedes."