Europe’s cyclical/defensive stock ratio

Compared to the US, trade and manufacturing make up a larger share in the European economy and Europe’s cyclical/defensive stock ratio is a good indicator for the global industrial cycle and the direction of US long-term bond yields. Over the past few months, European cyclicals have strongly outperformed European defensives indicating continuing positive momentum in economic growth and further upside in US long-term bond yields (10yr US Treasury currently at 1.24%). That said, investors have to factor in central banks’ determination to keep long-term rates at depressed levels.