We have seen countries like Switzerland (NYSEARCA:EWL) and China (NYSEARCA:FXI) face scrutiny as the economic slowdown picked up in the eurozone. As the demand in the common currency region declined, exports from those nations to the eurozone also deteriorated.
This caused concerns that the major countries in the eurozone, like Germany (NYSEARCA:EWG) and France (NYSEARCA:EWQ), will see a downturn, which could possibly take the region into another downward spiral.
Surprisingly, those concerns have shown some weakness in the most recent economic news.
Germany, the biggest economic hub in the eurozone and one of the only few countries to weather the economic slowdown in the region, had concerns that business will slow down. Fortunately, the indicators suggest this hasn’t happened yet.
The business confidence in the country has been improving, increasing for a third month in a row in July. In June, the Ifo Institute’s Business Climate Index increased to 106.2 from 105.9; the index is based on a survey of 7,000 business executives. (Source: Randow, J., “German Business Confidence Rises for a Third Month,” Bloomberg, July 25, 2013.) Keep in mind that businesses are the first to see changes in economic conditions; if they are optimistic, it’s considered a good sign for the economy.
But that’s not all: manufacturing in the eurozone also showed signs of relief, improving for the first time since July of 2011. The Flash Eurozone Manufacturing Purchasing Managers’ Index (PMI), reported by Markit, registered at 50.1 in July, up from 48.8 in June and reaching a 24-month high. (Source: “Markit Flash Eurozone PMI,” Markit, July 24, 2013.) Any reading above 50 on the PMI indicates expansion in the sector.
The manufacturers in the eurozone reported that the new orders increased for the first time since May of 2011. They also indicated job losses during the month of July were the lowest since March 2012.
France, the second-biggest hub in the eurozone, entered recession in the first quarter of this year, witnessing the slowest rate of decline in its output since March of 2012.
So where does the eurozone go from here?
At the end of the day, this is just one step in the right direction, and by no means does it suggest that the eurozone’s economic slowdown is over or that we are headed for recovery.
Investors should know the eurozone still has some major flaws that need to be fixed. For example, debt-infested nations like Greece, Spain, and Portugal are still in a deep economic slowdown. Italy, the third-largest economic hub in the eurozone, is also facing scrutiny due to its national debt, in addition to the economic pressures. Unemployment for the entire region is still at historically high levels.
Investors need to watch for more developments like these, because consistency in the economic data can provide signs of recovery.
For those investors who are short on the eurozone, they may consider taking some profits off the table or reducing their exposure in the region. The reason behind this is that even when things haven’t really changed much, the momentum and the surge in optimism might drive the markets higher, causing harm to their portfolio.
This article is brought to you courtesy of Moe Zulfiqar from the Daily Gains Letter.