With the UK stock market close to all-time highs, perhaps we shouldn’t be too surprised to have seen a slightly more risk averse attitude creeping back into markets over the last few days. The cited cause of this slight pullback, however, is something of a surprise. News that the European economy was weaker than expected in the first few months of 2014 should not come as a shock. We can see no reason to anticipate a sustained pick-up in economic activity in Europe any time soon. The eurozone is still grappling with the threat of deflation and substantial entrenched imbalances as outlined in David McWilliams’ insight article here.
But price behaviour in recent months would suggest that the market had started to believe that Europe’s problems were a thing of the past! For example, as the chart below demonstrates, Ireland’s 10 year financing costs recently fell below the UK’s for the first time in several years.