European Banks Roar Back as Japan Diversifies Away from US Bonds Amid Inflation Concerns

The recent market headlines have been dominated by Gulf tensions and inflation concerns.

Beneath those developments, investors are watching three broader trends: the surprising strength of European bank stocks, Japanese investors shifting toward European government bonds, and growing concerns over the economic consequences of populist politics.

European equities face numerous challenges, including high energy costs and competition from China. However, Goldman Sachs strategists argue that some pessimism surrounding European markets may be overstated due to projected double-digit earnings growth this year and strong portfolio inflows into European equities.

The performance of euro zone banks has been particularly striking, with the main bank stock index rising almost 210% since April 2023. Several European banks have delivered strong gains, including UniCredit (361%), Santander and BBVA (280% each), ING and Intesa Sanpaolo (185%), BNP Paribas (doubled) and Nordea (73%).

The shift in Japanese investment flows is also notable, with official data showing that Japanese investors reduced their holdings of U.S. Treasuries by $5.6 billion while increasing their exposure to French government debt by $2.2 billion, British government bonds by $1.5 billion and Italian sovereign debt by $1.2 billion.

The IMF has warned that periods of populism are historically associated with increased central bank lending to governments, deficit monetisation and higher inflation. The researchers also caution that the consequences can persist after populist governments leave office.