Money is leaving Europe. Investors have taken more money out of Eurozone this year than they have done at any time since the bloc came into existence. Capital is moving to the U.S. as investors bet on economic prosperity under Trump presidency. But the massive capital outflow from Eurozone has spark a dollar rally and left the common currency euro reeling.
Data released this week by the European Central Bank (ECB) put net capital outflow from Eurozone in the 12 months to September 2016 at €528.8 billion, the most since 1999. Of the capital that left Eurozone in that period, €497.5 billion was invested by Eurozone investors in assets like stocks and bonds outside the bloc. Global investors also sold €31.3 billion in Eurozone assets in that period, leading to the record €528.8 billion net capital outflow.
The capital exodus has pushed euro to near parity with the greenback. The euro was last seen at $1.0388 late Tuesday, the lowest level the common currency has touched against the dollar since 2003. The euro earlier tested a low of $1.0403 on Wednesday.
Selling Europe and buying U.S.
Investors have been flocking to U.S. assets since the election of Donald Trump as the 45th president of the U.S. in an upset victory against Republican candidate Hillary Clinton.
Trump’s campaign proposals seem to resonate with the investing community. His proposals included expanding government spending and creating new jobs to boost the economic. Trump also suggested enticing U.S. multinationals like Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), General Electric (GE), and others, with a tax holiday to allow them repatriate their offshore profits and invest it in the U.S. as part of his economic stimulus measures.
U.S. multinationals have stashed more than $2 trillion in overseas accounts because bringing the money back home under the prevailing tax regulations would attract a nearly 40% tax penalty. But Trump is dangling the carrot with proposal of a lower tax at only 10%.
If government increases its spending on infrastructure and the U.S. multinationals bring back the trillions of dollars, more jobs are expected to be created and consumer purchasing power is expected to improve, boosting corporate profits.
On the issue of creating more jobs in the U.S., several corporations have already pledged massive capital investment in the country. SoftBank, the owner of U.S. phone carrier Sprint (S), has promised a $50 billion investment in the U.S. that could yield more than 50,000 new jobs. Foxconn, Apple’s contract manufacturer, is also planning a factory investment in the U.S.
Trump has also prevailed on several U.S. employers to reduce the number of jobs they are taking outside the country. Carrier, for instance, agreed to scale down its overseas jobs plan after Trump worried about loss of employment domestically.
The Fed adds fuel to the engine
Hopes of economic prosperity in the U.S. has spark in the dollar amid strong demand for U.S. assets. The Federal Reserve recently added fuel to the fire by raising interest rates for the first time this year and the second time since 2008. The Fed further hinted more rate hikes are on the way next year. The central bank is planning three rate increases in 2017, up from two it initially guided.
Higher interest rates make U.S. yield-assets more appealing and investors are pulling their money from regions like Europe and parts of Asia where interest rates are ultra-low or negative.
Although the selloff in Eurozone assets is rattling the euro, the downbeat euro is favorable for the regions export market as Eurozone products come cheaper in the global market. That could give a boost to Eurozone stocks as they are able sale more and generate more profits.