Eurozone Economy and Equities Seemingly Disconnected

I wrote about this topic earlier this month and it remains perplexing. Eurozone economic indicators continue to come in under consensus expectations as reflected by the Citigroup Economic Surprise Index, which continues to decline and is now well below zero at -77. Yet in that time Eurozone equities have simply traversed sideways and even more recently have rallied by more than 5%.

Source: Bloomberg

Considering a longer-term view (below), it would appear that if anything it’s not the first time for Eurozone equities to rise in the face of continued disappointing economic data. But it would also appear that eventually equities smell the rot and likewise decline.

Source: Bloomberg

I would also point out in the above chart that 1) the Citigroup Economic Surprise Index bottomed in January 2009, two months before equities bottomed, and 2) the recent decline in the Citi index has been massive, plunging from +76 at the end of February to its current -77, further conveying severe unexpected trouble for economies in the region. One would expect investors to be more concerned and yet the Euro Stoxx Index suggests otherwise.

Note that it’s not as if the ECB is doing anything to support equities, with its balance sheet remaining in shrink mode:

Source: Bloomberg

I continue to scratch my head. Hmm, maybe this has something to do with it.