Eurozone equities eased back from their robust start to the week on Wednesday as investors awaited clarity over the prospect of a deal between Greece and its creditors.
The performance of eurozone shares this week suggests investors are trying to look beyond the drama of Greece’s drawn-out debt talks and are banking on a further outperformance of their US rivals so far this year.
As a result of aggressive monetary easing from the European Central Bank, which has helped suppress borrowing costs, there are increasing signs of a rebound in the economy, while companies are expecting stronger earnings growth.
Alexander Altmann, head of equity trading strategy for Emea at Citi, believes that barring a catastrophe in Greece, European equities have much further to go. “If you look at everything except Greece, things are looking great. It’s very hard to paint a bearish picture of European equities,” he said, adding that European corporates are seeing “robust earnings growth”.
The FTSE Eurofirst 300 index dipped modestly on Wednesday, having risen 3.5 per cent over the first two days of the week. Since the start of the year, the benchmark has gained 15 per cent, or 6.5 per cent when the euro’s depreciation against the dollar is taken into account. The S&P 500 stands 3 per cent higher since January.
The weakness of the euro against the dollar has helped export-led equities such as automobile manufacturers and data suggest a sustained eurozone recovery. On Tuesday, manufacturing figures touched a four-year high, in a sign of the economic recovery gaining momentum.
Craig Coben, co-head of global equity capital markets at Bank of America Merrill Lynch, said a key question is whether or not the Greek crisis can be contained and pushed to the back of investors’ minds, much like the conflict in Ukraine.
Although negotiations over Greece are still continuing, he said the fall in the price of implied volatility, a measure of market fear, suggests “investors think market risk today is less than it was last week”.
He added: “Once we get past Greece, the market will focus on what the central banks are going to do and if or when they are going to raise rates.”
Despite the positive fundamentals for the eurozone economy and company earnings, observers have warned the poor liquidity could exacerbate even the smallest tiding of bad news in Europe, whether that be a roadbump in its economic recovery or a re-escalation of the Greek crisis.
Institutional investors have largely held their fire for fear of further short-term shocks from Greece, said Mr Altmann, and the gains of the past couple of days have been partly driven by short position covering. “Liquidity is one of the scariest factors in the market right now.”