“While European growth is likely to remain lower than in the U.S., given the size of the discount and the fact that the major risk associated with Greece has been temporarily removed” suggests that equities in Europe “once again look attractive,” Koesterich wrote. “At this point, the selling may be overdone, especially since investors may be exaggerating Europe’s exposure to China.”

A stock rout has spread through the U.S. and Europe, erasing more than $5 trillion from global equity markets and pushing German stocks into a bear market. The selling is driven by fear the slowdown in China is worse than expected after the world’s second-largest economy unexpectedly devalued the yuan on Aug. 11. Commodities fell to a 16-year low and emerging-market currencies weakened to record levels.

“Companies exposed to global trade, particularly in Germany, have been singled out for special punishment,” Koesterich said. “German equities are now trading at less than 12 times forward earnings and 1.5 times book value, roughly a 45 percent discount to the U.S.”

“The selling has restored value to certain parts of the market,” he said.

Eoin Treacy's view

European equities remain more likely than not to continue to benefit from the ECB’s largesse with its QE program still due to run for another year. However while this is a positive medium-term consideration it is not driving equities prices at present. 


The Euro and Yen have been the carry trade currencies of choice for much of the last 12 months. The unwinding of speculative positions is seeing shorts unwound which is putting upward pressure on both currencies. Since the rally in European equities to date has been largely dependent on the weakness of the Euro, the unwinding of carry trades is a headwind. 

The DAX Index is oversold in the short term and potential for a reversionary rally is improving but a sustained move above the 200-day MA will be required to signal a return to demand dominance.