The Week In Hindsight, 28 July 2014

While better economic data and earnings out performance drove US and UK markets to a higher close, most European indices slumped last week. This was as violence in Ukraine worsened, while diplomatic pressure upon EU officials to approve further sanctions against Russia increased, and a raft of continental companies announced poorer than expected earnings performances.

In detail, the French Services PMI broke above 50.0 and back into expansion territory for the first time since March. However, the PMI survey for a much larger manufacturing sector underwent yet another decline, falling from 48.5 down to 47.6 during the month of July.

In contrast to French economic activity; German services and manufacturing accelerated during the month, with the services sector undergoing the more rapid expansion.

In addition to French and German data, Spanish unemployment dropped sharply from 25.9% down to 24.5%, indicating a further improvement in conditions for the beleaguered economy.  The IBEX 35 rose in response to the data, leading the index to outperform both French and German counterparts for the week.

In summary, the European economy as a collective whole continues to face challenges. This is as, despite progress, weakness on the periphery continues to suppress activity in core nations such as France.

However, a monetary policy environment that is weighted toward further loosening should serve to arrest the decline in price pressures, and the consequent rise in real interest rates on the continent.

While much remains to be done in terms of economic structural reforms, deficit reductions and budgetary rebalancing; the looser policy environment and a healing global economy offer scope for improvement over the months and quarters ahead.

All in all, despite mixed earnings performances to date for the most recent quarter, current conditions remain conducive to the belief that continental equities are good value at, and in some cases above, their current levels.