BNY's Geoff Yu highlights that Euro (EUR) assets are beginning to show value as the European Central Bank (ECB) maintains its current policy stance and inflation pressures ease. However, Yu emphasizes that this value case for euro assets hinges on confirmation from upcoming Purchasing Managers’ Index (PMI) data and corporate earnings, which must demonstrate stable growth in the Eurozone economy [1].
The ECB Governing Council is reportedly less unified on the economic outlook, with some members questioning the presence of second-round effects. Bundesbank President Joachim Nagel has warned that ongoing tensions in the Strait of Hormuz mirror conditions seen in March, suggesting continued vigilance is necessary. Despite this, Yu notes that unless the ECB signals a clear risk of a severe scenario, the likelihood of further rate hikes remains low [1].
Yu states, "The ECB stays on hold, with lower inflation reducing the urgency around further tightening, but European PMIs now carry the signal. The question is not whether Europe is strong but whether activity is stable enough to support the emerging value case in euro assets." He adds that the ECB’s communication will remain closely tied to its economic scenarios, with the "severe" scenario considered a tail risk and the current outlook somewhere between "mild" and "adverse". Confirmation of a "mild" scenario may not come until September, when the next set of forecasts could push CPI below 3% for the year [1].
Yu also points out that if the economic cost is too high, the ECB may need to set expectations for policy easing or a reversal of the precautionary hike implemented in June. While there is an emerging value argument for euro assets, he cautions that current financial conditions do not fully support this case, and growth and earnings confirmation is still required. European low-yielding assets are expected to struggle, while high-yield FX and perceived growth assets retain appeal, particularly as stagflation risks persist. Yu concludes that a strong rotation away from APAC and U.S. assets in favor of Europe is unlikely until these risks diminish [1].
CONCLUSION
BNY sees potential value in euro assets as the ECB holds policy and inflation pressures ease, but stresses that stable growth must be confirmed by upcoming data. The ECB is expected to remain cautious, with further policy moves dependent on economic developments and inflation forecasts. Market participants are advised to watch for PMI and earnings data before making significant allocation shifts.