The second quarter was only into its second day when US President Donald Trump announced global tariffs that would heavily impact European sectors like automotive, pharmaceutical and technology. While the full impact of tariffs on European economies is still unclear, and a US-EU trade deal is yet to be announced, markets have rallied since April, pausing only for the outbreak of war in the Middle East, before resuming their upward trend.
First-quarter trends such as the rising euro and booming defense stocks continued into the second quarter, despite the volatility seen at the start of April.
Here we look at five charts that explain the second quarter’s market moves:
Eurozone Markets Outperform UK
European stocks have continued to benefit from capital flows out of US equities and dollar assets. The Morningstar Europe Index hit new highs in the three-month period and is higher now than at both the start of the quarter and the start of the year.
Since April 1, the index, which includes UK stocks, is up 2.4% in euros. The Morningstar Eurozone Index, which excludes UK stocks, is 4.7% higher over the same period.
This compares with the Morningstar US Market Index, which is up more than 10% in dollar terms, helped by the recent recovery in the US’s largest stocks. In euros, though, the performance is below that of the Morningstar Eurozone Index, at just under 3%, so the depreciation of the dollar has been a key factor in the second quarter.
European Defense Stocks Rally Further
Within the industrial sector, Europe’s defense stocks continued to build on first-quarter gains in the second quarter. A wave of government commitments to rearm the continent has helped valuations, along with renewed conflict in the Middle East, ongoing war in Ukraine and a recent NATO pledge to spend 5% of annual budgets on defense.
Leading the way was Germany’s Rheinmetall RHM, which soared 33% in Q2, followed by Sweden’s defense stock Saab SAAB B, which rose 31%. The UK’s BAE Systems BA. notched up a 20% return over the same period. Year to date, Rheinmetall shares are up almost 200%.
Industrial and financial stocks were the sectors driving the biggest gains in both the Morningstar Europe Index, and the Morningstar UK Index.
However, Dutch semiconductor giant ASML, the second largest stock in the index, was the biggest contributor to Morningstar Europe Index’s gains over that period, with a rise of 10% in its share price.
ECB Cuts Rates Again
The European Central Bank made two rate cuts this quarter, bringing deposit interest rates down from 2.5% to 2%, half the rate seen at the peak. June saw the fourth cut of the year. The most recent rate cut of 25 basis points came as eurozone inflation hovered closed to its 2% target.
Market experts now forecast that the ECB will take a pause in its rate-cutting cycle, as it approaches the neutral or terminal rate of interest. September is seen as the likely meeting for the next rate cut.
Bund Yields Have Been Volatile
Germany’s Bund is the benchmark security for the eurozone and a proxy for the risk-free rate in the eurozone, performing the equivalent function in European portfolios to US Treasuries.
Yields have been volatile this year: on the one hand, Germany’s plans to remove the “debt brake” and spend billions of euros has raised the cost of borrowing. On the other, German sovereign debt has become a safe-haven asset amid the market volatility, increasing demand and bond prices. A series of European Central Bank cuts has also put downward pressure on yields.
Euro Gains at Dollar’s Expense
Tariffs and unease among global investors about US fiscal policy has contributed to the dollar’s weakness. While the dollar remains the global reserve currency, some see this as a pivotal moment for the eurozone currency, which launched in 1999.
ECB President Christine Lagarde said in a speech in June: “Shifts in global currency dominance have happened before. This moment of change is an opportunity for Europe: it is a ‘global euro’ moment. To seize it and enhance the euro’s role in the international monetary system, we must act decisively as a united Europe taking greater control of its own destiny.”
At the start of the second quarter, one euro bought $1.07 and that had moved to $1.17 by June 30. In late 2022, the dollar was worth $0.97.
