Euro area equity markets and shifting expectations for an economic recovery

Miguel Ampudia, Daniel Kapp, Kristian Kristiansen and Cornelius Nicolay

Economic Bulletin Boxes, 2020, vol. 5

Abstract: After a pronounced decline until mid-April 2020, near-term earnings growth expectations derived from surveys and derivatives pricing in euro area equity markets appear to have troughed as the economic recovery is expected to gradually take hold. At the same time, a number of indicators show that investors remain concerned about a more protracted weakness in the euro area economy. Moreover, and despite a significant improvement since the announcement of the pandemic emergency purchase programme (PEPP), market participants continue to price significant downside risks in equity markets in a highly uncertain environment. Nevertheless, equity prices continue to increase against the backdrop of a stabilisation in risk sentiment, global policy support, and the fact that tail risks of an imminent global financial crisis have faded to some extent. However, if current expectations of a recovery in earnings turn out to be overly optimistic, there will be substantial risks of significant renewed declines in equity prices. JEL Classification: E44, E52, G12, G15

Keywords: COVID-19; Equity markets (search for similar items in EconPapers)
Date: 2020-07
Note: 2445760
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