MacroResearchBoard

Euro Area Asset Markets: A Silver Lining In A Troubled World – March 17, 2025

A just-published report updated our recommended investment strategy, concluding that investors should stay on defensive until the trade war crests and a shift to pro-growth U.S. policies seems probable.

However, there is an important silver lining from the U.S.-led trade war and heightened tensions between the U.S. and Ukraine, namely an historic change in euro area attitudes toward fiscal policy, especially in traditionally conservative Germany. A more expansionary fiscal policy could be the catalyst to revive the sluggish parts of regional economy, providing trade war headwinds are no worse than modest.

An end to U.S. exceptionalism and upgrade in investor perceptions towards the euro area have caused a notable shift in relative performance this year. Meanwhile, as we had anticipated, German Bund yields have risen significantly and we envision a rebound in 10-year Bund yields to the 3.5% area.

Net: stay overweight the euro and regional equities within global FX and equity portfolios, and underweight euro area government bonds within a global hedged fixed-income portfolio.