A monetary divergence that could rewrite everything: flows, currencies, global imbalances. What seems stable today could be the beginning of a new cycle.
What if the central bank divergence is just the beginning of a new cycle? The Fed cuts rates and halts quantitative tightening, while the ECB remains on hold. This isn’t a technical detail, but a paradigm shift in capital flows, risk premia, and market narratives. A shift that could slowly but surely redefine the direction of global capital.
1) Effects on Currencies
A more dovish Fed means, over time, a weaker dollar. It won’t happen overnight, but the direction of flows tends to shift when the world’s leading central bank changes its tone. The result? A possible weakening of the dollar, especially if the US yield curve begins to steepen again and global investors perceive a lower risk premium.
The euro, on the other hand, could be supported, but not because Europe is "doing better."
Support would come from a differential in flows, not growth. In other words, if the ECB remains more restrictive while the Fed eases, yield-seeking capital could return to the eurozone, particularly in the periphery: Italy, Spain, and Greece.
But this scenario is fragile. Everything depends on maintaining a low-risk perception. If markets remain calm, we could witness the "day when the euro stops being the problem." And for those who remember the sovereign debt crisis, this concept is far from trivial.
2) Bonds and Curves
Rate cuts and the end of quantitative tightening: a powerful combination for Treasuries.
US curves could steepen again. This movement historically heralds soft landings or cyclical transitions.
This isn’t necessarily a sign of panic, but rather a duration revaluation: investors are going long: investors are going long on bonds again, seeking to capture yield before rates fall further.
In Europe, the situation is different. The ECB remains on hold, yields remain range-bound, and flows are less dynamic.
But this very "static" nature can become an advantage for peripheral countries: if the spread does not widen again, BTPs remain an ideal balance between risk and return.
3) Equities
This is where the most unpredictable part of the market comes into play. “In the United States, valuations are already stretched. A rate cut, therefore, does not guarantee a further rise. The market had already priced in the move, and the reaction may be lukewarm or even contrary if investors interpret the cut as a sign of economic weakness.
In Europe, however, the situation is almost reversed. European stock markets trade at lower valuations, a weak cyclical environment, and still fragile confidence. Precisely for this reason, if global flows begin to rotate and investors perceive a new balance between risk and return, European value stocks can finally regain prominence.
The favored sectors could diverge sharply: in the United States, AI, tech, and cloud dominate, with a focus on quality growth and large caps. In Europe, however, industrials, financials, utilities, and energy shine.
It’s the real economy that benefits from the new equilibrium. In other words: for the first time in years, investing in Europe may not be a leap of faith, but a rational option.
4) Systemic Risk
The divergence between the Fed and the ECB isn’t just an opportunity: it’s also a source of systemic vulnerability. When two major central banks move in different directions, the market tests the system’s limits. If the Fed forces cuts, it means something is broken.
Excessive easing can generate signs of latent stress: widening credit spreads, regional banks under pressure, tensions in the funding markets.
On the other hand, if the ECB stays put for too long, it risks pushing Europe into stagnation 2.0. And then there’s the third risk: a dollar that’s too weak. It could trigger instability in emerging markets and in China’s foreign currency debt exposure, fueling global volatility. This is the risk scenario the market is starting to price in: "When central banks diverge, markets test who is wrong first."
And it is in these moments that the narratives shift, going from optimism to caution in a matter of days.
So?
The divergence between the Fed and the ECB is not a detail. It is the trigger that can reshape global flows. America slows, cuts, and stops withdrawing liquidity. Europe isn’t growing, but it isn’t easing.
There’s no need to panic, but we must be careful: cycles change when no one notices.
The question is not whether the markets will react, but how. And, as often happens, the strongest reactions are precisely those no one expects.
Original article published on Money.it Italy 2025-11-05 07:51:00. Original title: 4 scenari di mercato di cui nessuno parla oggi. Ma è ora di iniziare a farlo
