Despite weakening economic growth, stock markets rebounded in Europe due to the implementation of “unconventional measures” and a reduction in the eurozone’s systemic risk, Patrick Legland, head of cross-asset research at Societe Generale, said in a report.
“The equity rallyshould continue until year-end thanks to the recent easing in some tail risks, particularly in Europe, together with a good set of economic figures from China,” Legland said.
European markets were lower Monday morning after Italian Prime Minister Mario Monti said he would resign; but analysts and market watchers pointed out that the move was expected, since elections will be organized in Italy next year, and said the market’s negative reaction was temporary.
As world GDP is growing slower and after central banks across the globe unleashed a wave of monetary easing, bond yields will stay “unattractive” for a while, with real yields on many government bonds sliding into negative territory, reflecting the cost of inflation that makes bonds expensive assets to hold, Legland said.
“In a quest for return, the only option left is to invest in equities, provided you believe the threat of systemic risk has vanished,” he added.
“Owing to some progress on Greeceand renewed signs of a cyclical upturn in China, fears of a systemic crisis have waned, despite some persistent concerns on the fiscal cliff.”
Legland noted that European equity market volatility hit a 5-year low of 17% but said that if economic growth continues to disappoint, European companies were likely to issue more profit warnings.
“Indeed, in some sectors such as utilities, telecoms or retail, the third quarter has been disappointing, and some have already warned on profits,” he said.
Banks in the single currency areaare healthier, with the spread between the 3-month euro interbank offered rate Euribor and the overnight indexed swap (OIS) rate down to levels not seen since before the beginning of the financial crisis in 2007, “indicating that tensions have eased in the eurozone banking system,” according to Legland.
“Making progress on the banking unionis crucial in order to support the fragmented eurozone banking system while breaking the vicious circle between banks and sovereigns,” he wrote.