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The euro area corporates are in a good position to expand, the corporates in this geography have become net savers and low-interest costs, lower dividend payouts, lower CapEx explains the shift.
Corporates’ capacity to accelerate CapEx looks good.
A couple of months ago, we still expected the Euro area to grow at only a modestly above-trend pace this year. However, business and consumer sentiment have improved sharply, with the composite PMI signaling 3% growth in March. This prompted us to raise our 2017 growth forecast to 2.2% Q4.
European FX vs. equity implied correlations currently trade in the 0 -20% range in 6M –1Y expiries, which might be fair relative to current realized correlations but ought to reprice higher in coming months if a concerted European asset rally reverts corrs back to average levels of the 2010-2012 period (refer above chart).
Investors have already started to take advantage of this dislocation and forced short-dated (<3M) EURUSD vs. SX5E correlations up to +25%, but there is still room for the move to play out in longer tenors.
EURUSD > 2% OTMS, SX5E > 5% OTMS: dual digitals costs 14.5% EUR indic. in 3M tenors (indiv. digis 43% and 26% respectively) and 18.5% EUR indic. in 1Y (indiv. digis 58% and 37% respectively).
