On Tuesday, the euro experienced its largest one-day increase versus the dollar in over two months. The increase was fueled by an increase in inflation in the Eurozone as well as rising prospects of an agreement between Greece and its creditors. Other metrics also indicate that the economic environment of the bloc has improved. This increases its attractiveness of the region as an investment destination.
Euro Surges, Greenback Slips
The euro increased to $1.1195 before declining to $1.1151. At 2%, this is the highest gain on a single day in percentage terms since Mar 18. On that day, the Fed had reduced its growth, inflation and interest rate projections. Other factors also weighed on the dollar, such as dismal factory orders data.
Combined with optimism over the Greece situation, these factors propelled the euro higher. This came as a surprise to many market watchers following continual strength in the dollar.
The greenback has gained from mid-2014, following expectations of a rate hike. Following a series of weak economic reports, the dollar softened in March. However, the dollar rebounded in the second half of May, following better economic data. Over the last two weeks, the dollar has exhibited significant strength before its plunge on Tuesday.
Inflation Rises
There is no denying that economic conditions have improved in the Eurozone. Tuesday’s inflation data was further evidence of the fact. Consumer prices increased in May, the first upward movement over six months. Prices increased 0.3% after staying flat in April.
There was also evidence that this was not caused solely by an increase in energy prices. Services prices increased 1.3%. Drink and food prices gained 1.2%. More importantly, core inflation spiked 0.9%, after hitting an all-time low of 0.6% in April.
Resurgence in Economy
It is thus evident that ECB’s efforts to curb deflation are bearing fruit. Even so, inflation is far lower than the target of around 2%. This means that the central bank’s monetary easing plans remain firmly in place.
The ECB announced a 1 trillion euro bond-buying program, which started on Mar 9. ECB will buy government bonds worth 60 billion euros a month through a quantitative easing program. The QE program will continue till Sep 2016.
Among latest data, the bloc’s unemployment rate slipped from 11.2% in March to 11.1% in April. Meanwhile, a survey conducted by Markit showed that companies in the economic union added jobs at the best pace in the last four years in May. Per the ECB’s last forecasts released in March, growth in the region is expected to touch 1.5% this year and increase to 1.9% and 2.1% in 2016 and 2017, respectively.
Situation in Greece
At this point, the singular area of concern for the region, as well as investors across the world, is the impasse over Greece’s debt. One major cause for optimism on Tuesday was news that the country’s lenders have agreed on the conditions of an offer to be made to the government in Greece.
Officials from the IMF, among others, have finished working on a draft agreement to be presented before Greece. However, the terms lay emphasis on significant structural adjustments in the economic sphere. Meanwhile, Greece has submitted its own proposal, whose fiscal targets are set far lower.
It is widely believed that Greece has the funds to pay €300 million ($327 million) to the IMF, which is due on Friday. However, without more financial assistance it may be unable to meet further repayments amounting to €1.25 billion due later this month. Several analysts believe that an agreement may not be reached at a meeting in Brussels between the European Commission chief and the Greek Prime Minister.
This means that uncertainty over the debt crisis is likely to prevail for a while longer. But the prospect of “Grexit” remains unlikely at this point. For one, it may lead to instability in the currency union, an outcome other members of the EU would be eager to avoid.
Even if this does happen, the impact may be limited. This is reflected by the yield gap between Spanish and German sovereign debt. The gap may have increased, but is only the largest since May 28. This is a direct outcome of ECB stimulus which is containing borrowing costs for the bloc’s indebted nations.
Our Choices
Below we present three stocks which will gain from these trends, each of which also have a good Zacks Rank.
Delhaize Group (DEG - Snapshot Report) is a food retail company based in Belgium. It operates supermarkets in Belgium, Luxembourg, Romania, Serbia, Indonesia, Greece and the U.S.
Delhaize holds a Zacks Rank #2 (Buy). The company has expected earnings growth of 10.2% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.9.
Apart from a Zacks Rank #2 (Buy), Philips has expected earnings growth of 84.4% for the current year. It has a P/E (F1) of 28.36x compared to the industry average of 33.60x.
AVG Technologies N.V. (AVG - Snapshot Report) provides antivirus and Internet security products. The company produces and develops software for, threat detection, threat prevention and risk analysis.
AVG Technologies holds a Zacks Rank #2 (Buy) and has a P/E (F1) of 15.19x.
Despite uncertainty over the situation in Greece, the economic environment in Europe is expected to improve further. Meanwhile, the ECB will continue with its monetary stimulus which already seems to be delivering results. This is why these stocks would make for a prudent choice.
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