Economic Recovery in Europe: Are Markets Overreacting?

Lately the most often heard question in analysts meetings with investors is if the markets are overreacting over the nascent economic recovery in Europe. The stock indices are at highs and the profitability of sovereign debt has skyrocketed in countries such as Germany, which would be anticipating a possible rise of interest rates earlier than expected (end of 2015 for the euro zone).

To such a degree of optimism, the ECB has opted for caution messages, although it appears that, for now, it’s been without much success. Chairman Draghi said in his last monthly press conference that he could not share the enthusiasm for euro zone’s recovery. “Shoots are still very, very green, ” he said.

Since Draghi uttered those words, the profitability of the so-called ‘core’ debt (from the euro zone’s richest countries) has continued climbing positions, with the German bund overcoming the barrier of 2%. “Central banks are trying to keep expectations anchored, but markets are not paying attention,” analysts insist.

Even American investors are betting on the European economies’ recovery. In the first six months of the year, pension funds and other big American groups have invested more than 65 billion dollars in shares of European companies, the highest figure in the last 36 years, according to a Goldman Sachs report.

Business confidence indexes and the latest revisions of the euro zone and Britain’s GDP growth could indicate that the European stocks rally will continue at the end of the year. And the same can be said of the expectations of the German bond, which many see very soon at 2.5%.

Among so much euphoria, increased in the last days by oil prices going down due to the possible diplomatic solution to the conflict in Syria, have emerged the first voices that add to the ECB’s wariness.

Some experts recall that the recovery of the European economies is still very incipient, with growth figures for 2014 that barely reach 1%, and inflation well below the ECB’s 2% target and unemployment rates above 12%. If we add to this that credit is still not flowing in the peripheral economics, one can wonder if really there are enough reasons to open the champagne.

*Image by Reuters.