Europe is ‘not yet seeing signs’ of recession: Macro strategist

BlackRock Senior Macro Strategist Laura Cooper joins Yahoo Finance Live to discuss recessionary risks for Europe, inflationary pressures, stock market futures, and the outlook for the European economy.

Video Transcript

BRIAN SOZZI: New inflation data from Europe is sparking concerns the Eurozone is teetering on the brink of a recession. Lauren Cooper is a BlackRock senior macro strategist and has a focus on the Eurozone. Laura, good to see you here this morning. Is Europe in a recession?

LAURA COOPER: I think at this point, we're not yet seeing signs that Europe in recession. Yes, I think the upward inflation pressures that we are seeing in terms of the upside surprises coming through does certainly intensify the risk of a recession. But at this point, yes, the energy shock could curtail growth. We're not yet kind of declaring a recession at this point.

But I think crucial will be to watch the ECB and how they react to these inflationary prints. We're already seeing money markets ramp up those tightening bets to above 100 basis points of hikes by year end. And so, I think it'd be quite interesting to see the commentary about how they're viewing these inflation prints in the context of a challenging growth backdrop.

BRAD SMITH: To what extent do you believe that the ongoing pushback against Russian energy imports and any type of sources of energy from there are going to continue to contribute to, quite frankly, the detriment that's already been incurred, especially in the European markets?

LAURA COOPER: Well, I think at this point, it's a fairly limited reaction as to what we expect. It still has to be implemented. And then it's going to be likely phased in over a six-month timespan. And I think, yes, this aggravates the energy shock, but actually, if we look at what the data is telling us already, we actually see that oil and natural gas import volumes to the continent have actually increased since the invasion of Ukraine.

So I think at this point, yes, there could be a lag effect. But given the fact that oil prices are sitting at about $120 a barrel on the back of this, if anything, we're kind of dismissing it at this point, but certainly watching, going forward, for, actually, implementation going forward.

BRIAN SOZZI: Laura, I think a lot of folks-- a lot of investors watching us right now, they are mostly invested in the US, and they're probably wondering, well, how does Europe impact my portfolio? What do you think a tightening, an aggressive tightening by policymakers in Europe, what would that mean to US folks, investors?

LAURA COOPER: Well, I think, certainly, what we're seeing in terms of flow data as well, we are seeing this flight to quality in terms of US. So even when we look at European-based investors, they are seeing kind of that quality tilt within US equities as quite attractive.

And as you mentioned, this is really reflective of the fact that there is a great deal of uncertainty, not only on the growth outlook in Europe, but again, its exposure to Russia and to other kind of big export markets, but as well in the US. We have still uncertainty around the policy outlook there. And given the cloud of uncertainty, I think it's quite prudent that investors are looking to the US. And in fact, this is one of the reasons why we downgraded our view, not only on developed market equities, but certainly within Europe because of the growth challenges ahead.

BRAD SMITH: So, with the volatility that's certainly been experienced across the DAX, the FTSE, the CAC, at this point in time, are you expecting that there are pockets that investors will start to lean into? And if so, where are you seeing those pockets?

LAURA COOPER: Yeah, and I certainly think that is the case. And I think this type of environment does warrant being quite selective. And in fact, when we have client conversations, that lack of conviction in terms of directionality does suggest that there is this need for being quite selective on both the sector and factor basis. So, for example, if we look, healthcare is actually seeing quite strong flows, as well as utilities. It's really those defensive sectors, those defensive tilts, that are starting to be quite attractive to investors. And likely, that's going to be a trend that is going to persist.

But another interesting fact that we are seeing is that tech, we've seen a significant derating already this year. Yes, it's been quite downbeat in terms of looking at, for example, the NASDAQ year to date. But again, this quality tilt, we are still seeing fairly robust earnings. And given the fact that valuations have come up quite a bit in line with their longer term averages, we are still seeing tech as an attractive play here, and despite kind of the backdrop of potentially even rising rates.

BRIAN SOZZI: Laura, as a macro strategist, perhaps, you can help me understand this one. Do higher taxes on the wealthy and corporations, does that help bring down inflation?

LAURA COOPER: I mean, I think it's quite dynamic in terms of, we can't necessarily look at it from a broad brush. So if we look at what I think the interesting thing in terms of inflation dynamics now, the fact that we are seeing it pivot away from goods and towards services sectors. And so, yes, we could potentially see those lower income households, who are hit more by inflation that could actually start to feed into the consumer data. We're not yet quite seeing strong signs of that.

But certainly, I think at this point, it's really the underpinning of inflation that's going to matter most. Predominantly, if we look at the US, it's really a broad inflation pressure backdrop. We have seen used autos. We have seen housing. We have seen a number of different components come under pressure, whereas in Europe, it's largely more contained within the energy price shock. So I think it's really interesting dynamics for central bankers to watch on the inflation front going forward.