Postive corporate news boosts European markets

This year, no news is better news for the eurozone and July was a quieter month for the region. Moodys’ downgrade of Portuguese debt was widely expected and the rating agency kept the country well above junk status at A1, down from AA2.

The International Monetary Fund also kept its prediction of growth for the eurozone as a whole unchanged at 1%, although it did suggest the greatest risks to the global economic recovery were still posed by the weaker eurozone countries.

There were even some pockets of good news. The Irish Republic finally left recession, with growth in the second quarter rising by 2.7%. Eurozone manufacturing and service data came in better than expected, with the performance of both sectors in Germany particularly strong. This suggested resilience in private consumption, which was cheering for economists and implied GDP growth in the third quarter of 0.7% from 0.5% in the second quarter. Industrial output also improved over the month, rising 0.9%. However, the results showed a marked difference between core and peripheral Europe with Germany and France strong and Spain and Portugal still contracting.

The stress tests carried out on Europe’s banks were not disruptive, even though many considered them insufficiently robust to be informative. Seven banks failed out of 91 – none of them surprises and most of them in Spain. There remain some concerns about the European banks’ willingness to lend to each other, which the stress tests did little to rectify.

Corporate news was generally good, with surveys suggesting a marked improvement in companies’ confidence. A raft of companies beat analysts’ forecasts for the second quarter, including behemoths Siemens, Volkswagen, BASF, Telefonica, Repsol and Royal Dutch Shell. Industrial companies have led the way and this was one in the eye to those who suggested the recent strength in the eurozone was all down to the World Cup. The weak euro is undoubtedly benefiting some of the manufacturing groups, particularly in Germany.
The FTSE Eurofirst index was up 4.9% for the month, behind the US and UK, but ahead of Asia. The weaker countries saw stronger stockmarket performance as investors re-embraced risk. For example, the Spanish Ibex index rose 16% in July, while the German Dax rose just 4.5% and the French CAC rose 9%. European funds have a long way to catch up, however, and remain the only equity sector in negative territory this year. The Europe excluding UK grouping has fallen 5.22% over the year to date.