Newspaper article The Christian Science Monitor

European Markets Follow US Pattern as Recession Fades and Interest Rates Drop, Paris, Frankfurt, and Madrid Markets Boom

Newspaper article The Christian Science Monitor

European Markets Follow US Pattern as Recession Fades and Interest Rates Drop, Paris, Frankfurt, and Madrid Markets Boom

Article excerpt

ACROSS much of Europe, industrial activity is flat or falling, unemployment is at record highs, and discussions rumble with concerns of an agitated autumn as more workers face poor job prospects.

So why are stock markets in Germany, France, and Spain - three countries whose economic fundamentals reflect most glaringly Europe's recession - enjoying record highs after a summer of the big rally?

The surge in European markets "has nothing to do, of course, with present economic performance," says Peter Pietsch, senior economist at Commerzbank in Frankfurt. "It's all about anticipation."

What market investors anticipate is a steady fall in Europe's interest rates and a pickup in activity next year, say analysts in Frankfurt, Paris, and Madrid.

Longer term, what the markets are anticipating is one of their favorite scenarios: a period of sustained growth with low inflation, driven by companies that are much leaner than they were before the downturn. That should mean higher profits.

"We are coming out of a period of four to five years where market activity was slight, but during which time there was a considerable restructuring of industry, with cutting of fat and an impressive refocusing on exportable goods, especially in France," says Alain Leclair, vice-chairman of Paribas Assets Management in Paris. "Now we are in a cycle of a revaluation of shares."

A scenario already played in the United States is crossing the Atlantic. "The US was the first country to go into recession, with Canada and the UK," Mr. Pietsch says. "Now they're first out of the trough, having forced down interest rates. People are expecting a transfer of the same picture over here."

In fact much of the steam behind Europe's rally is coming from American investors who have already played their hand in the US bull market, Mr. Leclair says. Now they have turned to markets with room for growth. …

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