LIVE MARKETS-European equities and the euro: it's complicated

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EUROPEAN EQUITIES AND THE EURO: IT'S COMPLICATED

When you ask European equity investors and strategists about the euro, they tend to look pained and change the subject. But with the single currency having tumbled from above $1.12 in September to as low as $1.013 at the depths of Monday's rout, they're starting to have to think about it. EUR=EBS

And in fairness to them, the relationship is a little complicated, as Goldman explain in a Tuesday note.

First of all, they say European earnings per share estimates do tend to rise with a falling currency - especially given the global exposures of European companies. Goldman also say this is something they have seen recently.

But it's not as simple as that, since Goldman also say European equity is positively correlated to the euro.

How so, if earnings per share are rising? They say: "euro weakening normally comes alongside a rise in the risk premium, which offsets translation and/or competitiveness advantages."

There's also a further complication, namely that a lot of investors in the European equity market are dollar-based.

"This means that, unless they currency-hedge, they lose in an FX fall, which we find discourages investment. A strong dollar has tended to mean under-performance of non-US markets historically," Goldman write.

So it's all a bit complicated. Maybe that's why they keep changing the subject.

(Alun John)

EARLIER LIVE MARKETS POSTS:

A "FASCINATING" EARNINGS SEASON AHEAD FOR UK BANKS CLICK HERE

BACK TO EARNINGS CLICK HERE

EUROPE BEFORE THE BELL: HERE WE GO AGAIN CLICK HERE