Euro Strategy: Post-US Election Update

The knee-jerk reaction across European risk assets to the US election outcome has been largely positive with spreads/CDX notching tighter and equities rallying on the view rising tides lifts all boats, albeit with a few standout pockets of weakness given the renewed threat of US tariffs and trade wars. Euro sovereign yields meanwhile have been on a roller coaster as the market grapples with mix of competing factors, including reinflation versus growth concerns, ECB versus Fed policy rate expectations, FX volatility and snap elections in Germany.

While there is a wide range of variables and uncertainties into 2025, there are several key constants that leave us with a cautiously constructive view on Euro IG & HY credit, including strong technical tailwinds, stable fundamentals and valuations that look reasonably compelling on a global relative value basis. While we think it is reasonable that Euro IG spreads should reflect a higher risk premium compared to US IG for the reasons discussed above, we think potential widening between the two markets is contained for now.

We view the possibility of renewed tariffs by the US on imports as having the most disruptive read through for European corporates and the broader economy. Even so, the range of scenarios and implications for Europe at this point is too wide to provide conviction. As such, we will wait for the facts rather than trade on the unknowns, and we maintain our existing Market Weight recommendations across Euro IG & HY credit. We would look to become more cautious on if the differential between Euro and US spreads reaches parity.