Do not let this rally deceive you. Europe is still lagging behind

Do not let the renewed, epic rally in European action give you empty hopes. From a fundamental point of view things in Europe are not at all good.

Bank of America's Merrill Lynch Macroeconomic CMI for Europe still shows signs of sword direction. According to the bank's strategists, the main bad indications come from the decline in deflationary bond spreads and the contraction of Europe's GDP growth forecast. This is just one addition to the already negative expectations for the overall reporting season.

"The current European stock rally is on the brink because of the contraction in spreads on European bonds, which is in line with the FED's dovish position, but fundamentally nothing has changed." - says Manish Kabra, chief strategist at Bank of America. "A decline in the CMI indicator means we can expect further price hikes in European stocks."

The Stoxx Europe 600 index is up 8.5% since the beginning of the year due to renewed optimism in investors that the Fed has changed its position towards "more patient" and that China and the US can reach a trade agreement. The extraction, retail and IT sectors are leading in 2019, while the telecom industry is lagging behind.

Source: Bloomberg Finance L.P.

Graphs: Used with permission of Bloomberg Finance L.P.

Read more:

• PIMCO 2020 expectations: lagging US economy and strong EM currencies
• Liquidity: a major problem for traders in 2020
• Six reasons to remain optimistic in 2020
• The mess with the REPO market and what it is
• ETF’s: The battle of the Titans for the top spot