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European Equities Retreat, Could Have Further To Go

Eurozone PMI is still in a slump, and stocks are mostly above their historic PE medians

The shine has come off European equities recently as a combination of geopolitical tension and concerns about the financial system raised by the Banco Espirito Santo SA ELI:BES scandal have caused asset managers to reduce the eurozone overweight they've had since the beginning of the year. According to Goldman Sachs' Macro-data Assessment Platform MAP, which measures actual stock price performance against macro indicators, Europe has been underperforming recently, but it could have even further to fall.

European equities underperforms relative to macro indicators, but PMI tells another story

Whether you break down performance by country or region, Europe is lagging while emerging markets outperform and the US continues to surprise to the upside, conclude Goldman Sachs analysts Noah Weisberger and Aleksandar Timcenko, based on the investment bank's MAP measure.

European equities MAP returns 0814

European Equities global equities rel macro 0814

The mismatch between macro indicators and stock price performance should make you wonder if some healthy companies are getting caught up in the fears about tension between Russia and Ukraine, but there is one indicator that should give you pause: eurozone PMI has been in a slump.

European Equities  euro pmi slump 0814

On the other hand, Weisberger and Timcenko point out that the euro appears to be at the beginning of longer term weakening based on two-year swaps. Whether that signals market concerns about the European economy or the expectation that the European Central Bank will take stronger action to fight deflation, it should at least be good for export-oriented parts of the economy.

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