Euro zone economy still strong

July was quite a volatile month, for most of which Greece again occupied centre-stage. Coupled with the concerns about the collapse of the Chinese equity markets, these two issues brought volatility to the financial markets. Now, since the Hellenic government and the European Union are close to reaching agreement on a third bailout programme, and even if doubt subsists about its execution, the Greek debt crisis seems once more contained, at least for a while.

The problem appears a little more complicated in China. After witnessing a collapse of its stock markets, the Chinese authorities tried to contain the fall, especially by buying its own equity markets. In addition, several disappointing economic data were also released, creating confusion on the actual economic situation of the country. The current government-imposed devaluation is accentuating the concerns as it is difficult to evaluate whether it is a simple adjustment vis-à-vis other currencies in the region or another sign a of a deeper problem. As long as the currency depreciation is relatively contained (no more than 10%), we consider that the other economies will only be moderately impacted.

Beyond the turmoil caused by these two specific issues, fundamentals in the major western economies continue to strengthen. PMIs are still above 50 in all regions (see chart 1), showing that economies are continuing to expand. Moreover, after being below zero for several months, the G10 economic surprises index returned to positive territory in July (see chart 2).

More particularly, the euro zone seems to have not strongly suffered from a scepticism linked to the crisis in Greece: its two PMIs are still clearly above 50 and the euro zone economic surprise index is again clearly positive, reflecting a better-than-expected situation. Stateside, the trend continues: the US PMI manufacturing has decelerated but is still stronger than in other major economic areas while PMI services reached its highest level in a decade. We still expect better economic momentum in the US and a firmer economic recovery in the euro zone for the second half of the year.

Read the full Cross Asset Allocation Investment Strategy - August 2015