Markets: Early days for europtimism

Investors in the eurozone should be extremely wary of taking a few upbeat economic numbers at face value.

Despite the improving data coming from Europe, National Australia Bank senior economist David de Garis isn’t overly optimistic of a sustained recovery for the region.

Equity market investors must be suffering from a case of tunnel vision, celebrating improving data points while forgetting the issues that menace the eurozone as a whole. The improving economic data has by no means contributed to solving Europe’s problems.

Indeed, de Garis points out IMF figures that suggest more fiscal austerity is to come. It is questionable whether the eurozone can get through another hit of fiscal austerity without it crippling growth across the region and individual strengthening economies.

Surprisingly, global equity markets have gorged on the improving Euro zone purchasing managers’ index (PMI) numbers released last night. The index climbed to 51.7 in August, up from 50.5 a month earlier.

European equity markets were quick to respond, with all major indices pushed into the green. The move was convincingly supported by increased volumes. The local market has built on these leads today. Anyone would think Greece had been expelled from the uuro and unemployment had been fixed.

We cheered Europe snapping a six-quarter recession with growth of 0.3 per cent in the June quarter. Since the GDP data came out, the Euro Stoxx 50 index is down 1 per cent – evidently investors’ excitement about these figures was short-lived. The reality is they are building on flat lining growth so it isn’t as impressive on a second take.

Unemployment in the euro zone is still excessively high at 12.1 per cent. Both Greece and Spain have numbers over 25 per cent and France and Italy over 10 per cent. In contrast, pre-crisis Greece and Spain had unemployment levels hovering around 9 per cent.

With unemployment so high and lacklustre GDP numbers, just what do investors see in Europe for the immediate future?

A sustained recovery in Europe would require unemployment numbers to come down significantly from where they are now. There is a reason the US Federal Reserve was targeting an unemployment level to measure the effectiveness of its stimulus programs. Perhaps if European policy makers focused on building demand to take the weight off the slack economy it would be a different story.

Greece is still the problem child for the Eurozone with too much debt and not enough income. The minute Greece looks like hitting the headlines again, global equities will resume sulking.   

There has been market commentary suggesting European equities are ready for their time in the spotlight. There is a reason valuations are cheap. You would have to be very brave to wager on that one.

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