Sentiment in Europe has soared to its highest level since 2001. However, in Europe as elsewhere,
such lofty sentiment should be taken as a warning for markets, not a green light. As we can
see from the top-left chart, previous peaks in economic sentiment have coincided with sharp
declines in equities. Europe has become a very consensus trade. Our leading indicators agree
with the consensus, ie that eurozone growth should maintain its solid momentum. But the
market now looks priced for perfection, and anything unexpected may have an outsized impact
on the market.

Much of recent equity flows into European equities have been unhedged. Compare this to 2014
when QE was in full flight, and consensus expected a weaker euro. The vast amount of flows
into European equities were hedged (top-right chart). Now, investors have allowed themselves
to be long the euro, which we can see manifested in the highest net long CoT position we’ve
seen in the euro since 2013 (bottom-left chart). Any change in investor sentiment could lead to
sizeable declines in European equities and the euro. As the bottom-right chart shows, economic
surprises have already been rolling over in Europe, which is consistent with a weaker euro.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception