Long Europe/Short US: Too Far, Too Fast

Our tactical framework highlights how financial conditions and economic surprises interact, where growth often sows the seeds of its own demise. Markets price expectations efficiently but lack perfect foresight, making data surprises key to price action. Growth surprises tighten financial conditions by raising yields and strengthening the currency, slowing growth until weaker data loosens financial conditions and reignites positive surprises.

The US and Euro Area are currently at odds in this cycle. US economic surprises fell short of lofty expectations, while European forecasts had become so pessimistic they could only improve. Disappointing US data sent stocks lower yet eased financial conditions through lower bond yields and a weaker dollar, which will soon become a tailwind for economic data. In contrast, euro and bund spikes tightened European financial conditions, weighing on activity that will stay weak until fiscal stimulus is deployed.  

Tactical investors should consider taking profits on long Europe trades, as the trend is getting extended. However, short-term dips in European assets create buying opportunities for long-term investors. EUR/USD should be bought after falling below 1.05, while German bunds should be sold on dips below 2.3%. Traders expressing the idea in the rates space should consider going long the December 2025 3-month ESTR futures contract vs. its SOFR counterpart.