Misplaced optimism in the European markets

EUROPEAN equities yesterday took a knock, finishing the session at a near one week low. As reports of lackluster demand for Apple’s iPhone 5 triggered a sell-off in US markets, some investors on this side of the Atlantic followed suit and booked profits on the recent strong bull-run in the European market.

Disappointing demand for the latest Apple offering was anticipated by some market soothsayers, after competitor Samsung reported record profits last week. But reports that Apple’s suppliers had been asked to scale back production of iPhone components was enough to cause the company to dip below the psychologically important $500 point in pre-market trading.

So is this the end of the remarkably resilient run of strength for European equities markets? Probably not. While European equities lost single points across the major indices, this should still be seen as remarkable (and potentially irrational) performance when you consider the broader picture.

Alongside risk-off sessions in both the US and Europe, triggered by a downturn in the world’s largest corporation by market capitalisation, yesterday also saw less than encouraging industrial data releases. It was announced that the 17-nation Eurozone saw a month-on-month fall in industrial production in November 2012. Seasonally adjusted production fell by 0.3 per cent, compared with a 1 per cent drop in October. Among the member states for which data was available, industrial production fell in 14 and rose in seven.

But in an example of the surprising resilience of the European equity markets, although Spain was one of the most disappointing results – with a fall of 2.5 per cent – the Ibex shed a paltry 0.28 per cent on the day.

And it is not just in the short term that European markets have run against the grain of fundamentals. Despite grandstanding from European leaders, the Eurozone has done little to address its fiscal deficits, and industrial production has been consistently disappointing. Yet markets have been in an unbroken bullish trend since June 2012, with the MSCI Europe index adding almost 20 per cent. Markets appear to be taking a rationally irrational approach to European equities, and buying cyclicals and financials in particular. Perhaps this is because, although investors know that things are still shaky, politicians have proved time and time again that they will run to the rescue and prop-up the Eurozone when the going gets tough. It’s unclear what troubles are brewing over the long run.