Economic risks in Europe may trump soccer drama next week
Americans are preparing to celebrate Independence Day, and most of the world is fixated on Brazil as the World Cup tournament field tightens.
Yet market attention might soon swivel toward Europe, with a full economic calendar set for the days ahead. Next week's activity comes amid concerns that economic lethargy could displace investor optimism about a return to growth and the effectiveness of central-bank stimulus efforts in the region.
The European Commission Friday reported an unexpected decline in household and business economic sentiment, and inflation in the euro zone has stubbornly remained below 1% since the fall, keeping big-picture fears of deflation nearby. The European economy nudged ahead by 0.2% in the first quarter, down from 0.3% the prior period, and now higher oil prices and skittishness over Russia and Ukraine are serving as the unanticipated threats of the moment. As Reuters quoted Christoph Weil, economist at Commerzbank: "The good news from the euro zone is that the economy is growing again. The bad news is that growth is excruciatingly slow."
European financial markets have retreated over the past week, with the iShares Europe fund (IEV) sliding 3.6% since Monday, led lower by pronounced weakness in large bank stocks. Continental banks continue to face the prospect of further capital-raising stock sales, and with BNP Paribas (BNP.PA) and Barclays PLC (BCS) perceived to be under continued regulatory assault in the U.S., they have lost favor.
Giving back the reflex gains
Equity markets across Europe have given back all, and more, of the reflex gains they enjoyed after the ECB’s June 5 move to charge banks for idle reserves in a bid to get credit flowing into the economy. This sets a slightly apprehensive context for the data, ECB policy meeting and series of speaking engagements by finance officials that will occur between Monday and Thursday.
Yes, this probably sounds like more of the same – false starts on growth, bold statements out of the European Central Bank that only fleetingly excite financial markets. One difference now, perhaps, is just how optimistic investors had become this time about assumptions of stable European markets and the prospects for further upside.
In the latest Bank of America Merrill Lynch global fund manager survey, professional investors had their second-steepest “overweight” position in European equities since mid-2007. Meantime, “peripheral” European debt – the bonds of Italy, Portugal and Spain, specifically – has rallied stupendously, with yields on Spanish 10-year notes dipping below those of the U.S. as deflationary pressures and the ECB’s backstop have emboldened investors. In that same survey, European peripheral debt was deemed the “most crowded trade” in world markets.