We have highlighted in previous Insights that sentiment toward euro area growth is dismal and that the bar for positive surprises was low. Indeed, incoming data is now beating these low expectations, which if history repeats, could trigger a near-term bounce in euro area stocks.
Since 2010, bounces off the bottom of the Citigroup Economic Surprise Index have corresponded with lift-off in European equity prices. Recall that a similar phenomenon was true for the U.S., particularly in the early years of the recovery from the GFC. As investors consistently doubted the recovery, equity prices slid when the data was disappointing and rallied whenever economic data was better relative to expectations.
The forward looking component of yesterday’s ZEW survey for the euro area is still at a very low historic level, but nevertheless reached an 11-month high and beat expectations. This is one example, but by and large, European data has been slightly stronger than forecast in recent days, according to the Citigroup gauge. If history is a guide, this trend could persist, opening up the possibility of a near-term rally in euro area stocks.