Euro Area Exits Record Slump Led by Largest Economies
Comment of the Day

August 14 2013

Commentary by Eoin Treacy

Euro Area Exits Record Slump Led by Largest Economies

This article by Angeline Benoit for Bloomberg may be of interest to subscribers. Here is a section
While the overall outlook has improved, the recession pushed the unemployment rate to a record and parts of southern Europe remain mired in a slump, with more than half of young people in Spain and Greece out of work.

“The upside surprise shows an underlying improvement in the euro zone as strong exports weakened the contraction in Spain and Italy and spurred growth in core countries, especially France,” said Ricardo Santos, an economist at BNP Paribas SA in London. “We'll have to wait more to see any improvement in the labor market, but this shows the worst part of the recession is probably over.”

Eoin Treacy's view The announcement that the Eurozone economy is emerging from recession highlights the effectiveness of making unlimited credit available via the discount window in shoring up the banking sector in particular. This direct support for the banking sector has contributed to improving confidence in the financial system more generally. .

The Euro Stoxx Index has rallied for seven of the last eight weeks and moved to a new two-year high in the process. The current area represents the upper side of a more than three-year congestion area and while a short-term overbought condition is evident, a sustained move below the 200-day MA, currently near 265, would be required to question medium-term upside potential.

The Index is being led higher by the banking and insurance sectors. The banks sector trended lower against the wider market until July 2012 and has performed more or less in-line since. The insurance sector fell less between 2008 and 2011 and has outperformed by a considerable margin since July last year.

While the comparative strength of the financial sector can be viewed as a positive, the resurgence of the materials and resources sectors is also noteworthy. The Euro Stoxx Basic Resources Index almost halved against the wider market between early 2011 and July. It has rallied impressively over the last week to break this year's progression of lower rally highs, suggesting a rotation is underway.

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