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Trade war, monetary stimulus cloud outlook for European equities

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Trade war, monetary stimulus cloud outlook for European equities

U.S. President Donald Trump attends a bilateral meeting with China’s President Xi Jinping during the G20 leaders summit in Osaka, Japan, June 29, 2019.

Kevin Lamarque | Reuters

Analysts are sounding a cautious tone on the outlook for European equities for the second half of this year.

Overly optimistic expectations about trade tensions and monetary stimulus coupled with Brexit and Italy’s spending plans could shake European stocks, four analysts have told CNBC.

“I believe equities to be in a state of illusory stability,” Francesco Filia, chief executive officer of asset management firm Fasanara Capital, told CNBC via email.

“Markets are propped up by the wrong expectations of further stimulus and a peaceful resolution to the trade spat. Both are likely going to be proven ill assumptions,” he added.

US-China tensions

President Donald Trump gave some positive signals to market players in June, after agreeing to restart trade talks with China. At the time, he also agreed to allow U.S. companies to continue to sell to the Chinese tech giant Huawei. Both countries have been at a deadlock over trade for more than a year.

The tension between the two largest global economies is, according to various economists and central banks, a major drag for the world economy and is particularly important for Europe, which is highly dependent on trade.

However, the resolution of the trade war between the U.S. and China is unclear. President Trump said Tuesday that there’s still a “long way to go” on trade talks with Beijing. His latest comments on the trade discussions put an end to a series of record highs on Wall Street.

Monetary stimulus ahead?

European Central Bank (ECB) President Mario Draghi has signaled that there could be further monetary stimulus in the region if there’s no improvement on the inflation front. The recent appointment of Christine Lagarde as the next ECB chief, starting November 1, has also suggested to market players that the central bank is likely to remain on the dovish side.

An Italian suicide or hard Brexit add to (the risks).

Florian Hense

Euro zone economist, Berenberg

However, there are concerns as to whether further stimulus will have a significant impact on the region.

“A new quantitative easing (program) would have a much weaker impact because the literature shows that there is very little marginal result once rates are so low and liquidity is already high,” Daniel Lacalle, the chief economist at Tressis Gestion, told CNBC via email.

The ECB embarked on a major stimulus package in the fallout of the sovereign debt crisis of 2011. However, interest rates are still at record low levels and the ECB has not managed to fully lift the stimulus pedal, raising questions about whether these policies will continue to work. 

Brexit and Italy spending

“An Italian suicide or hard Brexit” also pose risks to the European economy, Hense from Berenberg told CNBC.

European countries have to submit their spending plans for next year to the European Commission by October 15. There will be a big focus on Italy’s 2020 budget plan after Rome narrowly avoided tougher fiscal demands from Brussels twice in the last year.

Furthermore, the U.K. is currently set to leave the European Union on October 31. European countries decided in April to extend the U.K.’s departure to give further time to British lawmakers to find a common plan on how to exit the EU. However, there have been no developments in the House of Commons since the extension and with a new prime minister set to take office next week, there are growing questions whether the U.K. will request another delay or choose to leave abruptly on October 31 – the latter would bring a slew of uncertainty for business on both sides of the English Channel.

US-EU tariffs?

There’s another important date to note: November 18. The U.S. needs to decide before that date whether to impose car tariffs on Europe.

Earlier this year, the Commerce Department said Trump could justify imposing car duties on Europe based on national security grounds. Europe has rejected the argument and both sides are trying to negotiate a deal. Car tariffs would have massive consequences on the euro zone economy, where its growth engine — Germany — relies heavily on exports to the United States.

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