The State of Markets: “US-European Divergence: What Next?”

The divergence between US & European markets continues to grow. European indices once again made new highs last week (e.g. the DAX on Thursday), while US equities have rolled over into a pullback*. That’s illustrated in the chart below, with major EZ indices up 12-16% YTD (while banks are much higher: +32%). US equites, in contrast, are down by 2-4% YTD.

The key question, therefore, is: How long will that divergence last? Usually, in pullbacks, weakness in markets is initially narrow (in wave 1). Later in the pullback, the weakness broadens out to encompass most other key risk assets (i.e. in ‘wave 3’). Will that happen this time? Or, given Friday’s weakness (e.g. DAX: -1.7%), has Europe already ‘topped out’? We outline our views on those questions in recent research (see yesterday’s Longview on Friday publication for detail).

This coming week’s US macro data includes the NFIB small business optimism report and JOLTS job openings (both on Tuesday). The main data point is the US CPI release for February (due Wednesday). That will be followed by the first March estimate of the US Michigan sentiment survey on Friday. Elsewhere there’s a Bank of Canada policy decision on Wednesday and Chinese money supply and credit growth data is due on Friday. Please see below for a list of key macro data and events.

Key chart: Various US/European equity indices (YTD performance, local currency, %)

*NB most pullbacks consist of three waves. A three wave SELL-off pattern is comprised of i) an initial pullback (wave 1); ii) a relief rally (wave 2); and then iii) a final leg lower during which the index breaks below the lows from wave 1 (i.e. wave 3). In SELL-offs in bear markets, i.e. when the down trend is dominant, SELL-offs often consist of 5 waves instead of 3.

Upcoming important data/events this week:

Key Research

Tactical Equity Asset Allocation No. 254, 5^th March 2025:

“Pullback Underway –> & Likely Enduring a.k.a. 'Relief Rally’ Expected near term (But Temporary)”

US equities have fallen 5.9% in the past 10 trading sessions. Multiple SELL signals flagged up that risk in February. Added to that, the S&P500’s ‘bull run’ (since late October 2022) looked tired at the end of last year. For 5 key reasons, outlined below, it’s likely that the global equity market is entering a multi week, if not multi month, pullback. That’s typically the pattern after a ‘bull run’ has become ‘tired’.

That expectation is reinforced by the policy approach of the Trump administration. A fiscal tightening coupled with the implementation (or even threat) of tariffs is undermining the momentum of near term US economic growth. All of that is also exposing the prior effects of tight monetary policy (i.e. the ‘soft underbelly’ of growth in the US).

Key North American macro data & events:

Fig B: US Michigan sentiment (index)

Key European macro data & events

Fig C: Eurozone industrial production (Y-o-Y %)

Key UK macro data & events

Fig D: UK RICS house price balance (index)

Key Asia-Pacific macro data & events

Fig E: Chinese total social financing M2 & M3 money supply (Y-o-Y %)

Last week:

Longview on Friday, 7^th March 2025:

“Europe is Overbought; US is Oversold – Now What?”

Tactical Equity Asset Allocation No. 254, 5^th March 2025:

“Pullback Underway –> & Likely Enduring a.k.a. 'Relief Rally’ Expected near term (But Temporary)” 

The SHORT VIEW (& market positioning), 4^th March 2025:

“Aussie Dollar: Upside Risks Brewing” 

Prior week:

Longview on Friday, 28^th February 2025:

“Equity Pullbacks; US Mid-Cycle Slowdown Risks; Pricing Trump’s Economic Agenda; PLUS the Outlook for Gold”

Global Asset Allocation Alert, 26^th February 2025:

“Reduce Gold & Silver Exposure in Strategic Portfolio”

Longview ‘Tactical’ Alert No.88, 25^th February 2025:

“Equities: Pullback Underway? a.k.a. Stay Tactically NEUTRAL Equities & OW Treasuries”