The Eurozone economy may be about to do something unusual — beat expectations

  • Eurozone economic data has been fairly lagging for the better part of a year.
  • Markets will receive an update on how manufacturing and services firms across the bloc fared in March later this week.
  • Given the signals from China, there’s a reasonable chance that conditions may look a whole lot better.
  • Pessimism towards the European economy has weighed on asset prices across the region over the past year. Any shift in sentiment could see those moves continue to be reversed.

In the coming days the latest batch of flash PMI reports will be released, providing markets with the first glimpse of how manufacturing and services firms across major economies fared in March.

This link helps explain the ins and outs of PMI reports.

Of those that will be released, there’s likely to be plenty of interest in the Eurozone report given how bleak economic data has been across large parts of the region recently, including in some of the bloc’s largest economies.

Downgrades to growth and inflation have been aplenty as of late, including from the ECB, reflecting that data from the euro area has, in a broad sense, undershot expectations for the best part of a year.

Pessimism is understandably rife, but that may not remain the case for long if the chart below is any guide.


The index, from Morgan Stanley, shows the new export orders subindex in China’s composite PMI report, that which combines orders placed at manufacturing and services firms from abroad, overlaid against the Eurozone’s composite PMI.

The former has been advanced by three months, demonstrating that where foreign orders at Chinese firms move, activity levels in the Eurozone tend to follow.

After a pretty rotten run late last year, new export orders placed at Chinese firms are now showing signs of stabilising, pointing to an improvement in the Eurozone in the months ahead.

“We believe that a fair share of Europe’s slowdown last year was ‘made in China’,” said Graham Secker, Chief European Equity Strategist at Morgan Stanley.

“The sharp drop in growth there weighed heavily on Europe, given its sensitivity to trade and exports, and we would caution investors not to underestimate linkages between the two regions.”

Even before the Eurozone flash PMI is released on Friday, Secker says there’s already signs that economic growth across the bloc may be starting to improve.

“We’ve already seen better euro area retail sales and PMI data for February, implying that January marked the trough for data in this mini-cycle,” he said.

Sentiment towards the German economy — the largest in the eurozone — also improved sharply in March, according to the latest ZEW Institute report.

After missing the the downside for so long, some data across the bloc is now starting to beat.

And with pessimism towards the economy still fairly bleak, Secker says that combination could work in the favour for European stocks, along with the euro.

“Given the depth of poor investor sentiment towards the region, any confirmation that growth is rebounding is likely to have important and positive implications for asset prices,” he said.

It’s not only Secker who is aware of a potential rally in European assets, should sentiment towards the outlook for the Eurozone economy suddenly start to brighten.

In the latest Global Find Manager Survey released by Bank of America Merrill Lynch (BAML), respondents nominated being short European stocks as the most crowded trade in financial markets right now.

This has been a relatively good contrarian indicator previously, having warned about being long bitcoin back in late 2017 and short market volatility in January last year.

Both those trade imploded spectacularly in the proceeding months.

While that doesn’t guarantee a similar outcome for those pessimistic about European stocks, it reinforces the view of a growing risk of a potential short-covering rally in beaten down European assets.