In their note on the differences between Europe and the US, Goldman Sachs analysts warn that a mild surprise from central banks is needed to support the current stock market rally.
They point to the differences in Europe and the US, where European macro data are improving, while the US is showing signs of weakness.
“Our European strategists have shown that economic activity data is the main driver of stock performance and that central bank cuts generally help further,” the note said. However, despite positive European data, European shares have not reacted as strongly.
Goldman Sachs emphasizes the need for dovish action from the European Central Bank (ECB) at their upcoming meeting. “A real cut by the ECB at this week’s meeting and/or some easing of expectations is likely needed to support risky assets,” they argue.
They add: “In fact, aggressive surprises from persistent inflation increase the risk of ‘good’ macro news becoming ‘bad’ news for markets.”
The situation in the US is different. Equities remained stable despite weaker data, while safe havens such as the US dollar benefited. Goldman Sachs expresses concern that “risky assets could become more vulnerable to interest rate indigestion” with potentially weaker U.S. growth rates.
To support the stock market rally, Goldman Sachs believes that a smooth change of course from the Federal Reserve is crucial. They point to “low risk premia for both equities and credit” as factors that increase the importance of dovish Fed policy.
