The composite eurozone January flash PMI showed accelerating expansion led by Germany, but the PMI readings are still only showing moderate growth, considerably below the momentum achieved, for example, in the 2009/2010 green-shoots revival.

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170214_eupmisIn addition, investors should note that excess liquidity is rolling over in Europe driven by lower money growth and higher industrial production growth (excess liquidity here defined as money growth (M1) minus inflation (CPI, YoY) minus growth (industrial production growth, YoY).

170214_euexcessliqThis combination is usually a mid to late cycle phenomenon and is customarily bearish for risk assets. Finally, it is worth noting that despite expectations of a revenue and earnings recovery European companies are still largely falling short of expectations.

170214_European epsSource: Deutsche Bank, Feb 13 2014

This suggests to us that markets are getting ahead of themselves on Europe and are pricing in a stronger recovery than can reasonably be expected. What growth we do see will be low in comparison with earlier times and if real money growth continues to lose momentum, we might even see renewed weakness.