Yet Another "Annus Horribilis" For Europe
The bid disappeared
The tone has shifted from uneasy to fragile as the Middle East conflict continues to cast a longer shadow over the region. What initially looked like a relatively contained drawdown started to give way, with flows, headlines, and a clear reluctance to hold risk into the weekend all leaning the same direction. And when the bid disappears, it doesn’t take much to push things lower.
Source: LSEG Workspace
ECB stagflation dilemma
Macro surprises have turned negative in Europe, but so far, they remain resilient in the US.
Source: Macrobond
Inflation expectations
Inflation expectations have moved far more in Europe.
Source: Macrobond
Gas
European natural gas prices have nearly doubled since the conflict began, while US prices have risen only ~11%.
Source: GIR
Energy prices
Consumer energy prices sharply up but not uniformly across Europe.
Source: Haver
Tightened
Euro area FCIs have tightened by around 40bp since the start of the war.
Source: Goldman
Not what the continent needed
GS: "Our model points to a 0.4pp drag on growth this year from the energy shock."
Source: Goldman
Energy price shock to growth
Model-implied peak effect of energy price shock on the level of real GDP vs. pre-conflict baseline, %.
Source: GIR
Steepens / flattens
European 0-2 year yield curve steepens sharply, while the 2-30 year curve flattens.
Source: Macrobond
Source: Macrobond
Lifting the entire yield curve
ECB repricing has been lifting the entire yield curve.
Source: Soc Gen
Deficits
Weaker growth typically leads to wider deficits.
Source: European Commission
European "quality"
Quality stocks in Europe have significantly lagged the broader market recently.
Source: Datastream
Least eager
Europe doesn’t have a structural growth story to fall back on – no AI cushion, no obvious cohort to absorb flows when macro pressure builds. Positioning reflects that reality: selling has picked up, but similar to other regions it feels more like a lack of conviction, with growing interest in hedges underscoring the discomfort. Add in a macro backdrop where central banks risk tightening into a potential growth shock and the setup looks increasingly asymmetric. For now, Europe isn’t just lagging… it’s the part of the bracket investors seem least eager to bet on.
