Monday, March 25, 2013

Eurozone in Recession, yet Equities in Uptrend -- Huh?

With Cyprus being a big topic in the news, we're hearing more about the eurozone and in particular the economy(s) in that region of the world. The latest Eurostat data confirms that many of the economies in the eurozone are indeed in recession. The chart below further illustrates this weakness.

 Source: Bloomberg

The Citigroup Economic Surprise Index is a measurement of economic data surprises, reflecting the extent economic data releases are generally coming in above or below consensus expectations. When the Index is falling like in the chart above, it suggests not just that the economy is in trouble but also that the economic data being reported is worse than expected and therefore was likely not already priced-in or discounted. 

Expectations are what drive markets and if the eurozone economic data has been worse-than-consensus the last several weeks, one would expect eurozone equities to be in decline. However, take a look at the EURO STOXX 50 Index:

Source: Bloomberg

It's been steadily rising for months. 

Typically stock markets discount economic recessions six to nine months ahead of time, and yet while the eurozone currently finds itself well within an economic downturn, its equity index has been painting quite a different picture, one that is quite bullish. 

I remain perplexed. 

Also, note that the EURO STOXX is not overly represented or correlated with Germany, the strongest of the euro markets. The chart below shows stock indices for France, Italy and Spain, equal-weighted:

 Source: Bloomberg

If the eurozone is in a recession, someone forgot to tell investors!  
 

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