Euro zone still enjoying strong economic momentum

While decelerating in April, economic surprises rebounded in May in the euro zone (chart 1), meaning that the underlying economic trend is strong. After having recorded impressive economic growth in the first quarter, the subsequent rise in expectations explain perhaps why the economic surprises index decelerated last month. However, fundamentals are solid in the euro zone and the single currency area will continue to benefit from the depreciation of the euro, the cheap oil prices and the supportive financial conditions.

Greek negotiations are an issue for the euro zone as we go into summer. We consider that a fully-fledged deal between Greece and Europe is unlikely and that a temporary agreement to buy more time is the most probable outcome. Even this scenario would, in the end, be rather positive for the financial markets, as we believe the Greek population would vote in favour of Greece staying in the euro zone in any referendum on the final agreement. Until such a deal has been made, volatility will increase until a permanent solution has been agreed.

Once uncertainty has decreased on that issue, we think that the economic recovery will be firmer in the second half of the year, with stronger rebounds in peripheral countries like Spain and Italy.

As, given the above, we continue to expect short-term volatility, we have maintained our overweight on risky assets, coupled with a hedging strategy, to cope with the potential short-term stress on euro zone equities.

Stateside, while the US economic surprises index seemed to have reached a bottom last month, it has confirmed its trend by rebounding in May. After suffering from the harsh winter and the rise of the US dollar in the first quarter, we still expect the economic weakness to be temporary, with improved economic momentum in the US in H2 2015.

Globally, our macroeconomic scenario remains positive, as the economic recovery seems to be still on track, especially in the euro zone, and is supported by strong PMIs clearly over 50.

Read the full Cross Asset Allocation Investment Strategy - June 2015