By Investing.com – European equities have been on a roller-coaster ride of late, but BCA Research warned that investors should remain cautious into the fourth quarter of the year.
The European Central Bank meeting of two weeks ago hit markets with a bang, taking European equities above their mid-July peak. However, the resurgence of hostilities abruptly ended the rally, offering a stark reminder that investors should not dismiss geopolitics.
However, “with or without global instability, European equities cannot defy the gravitational pull from a deteriorating economic outlook,” analysts at BCA Research said, in a note dated Oct. 7.
A slew of economic data has surprised to the downside – the euro area manufacturing PMI fell back to 45, dragged down by a relapse in German manufacturing activity. Services activity is also showing signs of weakness, while the outlook for employment is also worrisome.
The softening of the eurozone labor market is a grim message for consumption, considering retail sales growth has already slowed meaningfully and consumer confidence is expected to tumble anew.
On the bright side, inflation in the euro bloc has dipped below its target to 1.8% for the first time in more than three years, according to the flash September estimates.
This gives the European Central Bank a window of opportunity to deliver a 25 bps rate cut at its meeting next week, especially as weaker growth and inflation are consistent with the shift in tone from President Christine Lagarde and Executive Board Member Isabel Schnabel.
“The market sees 90% odds of a cut in October, and 56 bps of monetary easing is currently priced in the €STR [euro short-term rate] curve between now and the end of the year,” said BCA Research. “Beyond that, our view remains that the ECB will have to cut interest rates more aggressively in 2025.”
However, these ECB rate cuts are unlikely to save the day for the eurozone economy.
“A recession later this year or in early 2025 remains our base-case view, with or without an October cut,” BCA said. “What does it mean for European equities? Simply put, the roller-coaster ride will continue.”