After a brief period of stabilization, our measure of global credit impulse has plummeted. This does not bode well for European equities.

The credit impulses in all three major economies – the euro area, the U.S. and China – are now negative, albeit very slightly in the case of China. This is the first time in three years that all three components have been simultaneously negative. And after hovering at a point of inflection the combined credit cycle indicator has lurched down again.

For any open exporting economy, such as the euro area, the global credit cycle is much more important than the domestic credit cycle. This is because the sales and profits of large European companies are sourced globally, not just from Europe.

According to our European Investment Strategy service, a weakening credit cycle normally precedes a poorer return/risk trade-off for risk assets such as equities – through lower returns and/or higher volatility. After their recent strong rallies, European equities seem vulnerable to any new downgrades to growth.

Hence, for short-term investors we advise against an absolute overweight position in European equities.

Source: BCAResearch

Category: Credit

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4 Responses to “Global Credit Cycle Lurches Down”

  1. AHodge says:

    absolutely right
    europe is going into big recession southern europe depression
    and this is the main reason credit starved
    the mutants formerly known as banks are broke to Euro 2 trillion –ray dalios number and mine
    they are so starved for credit that US and other banks are venturing over and doing a little of the safest
    nothing even in the works for EU steps will fix this
    The ECB has basically done all it can on the liquidity side–somewhat like the fed did in 07-08
    for what is basically a solvency problem
    they have a cliff of their own
    a credit cliff
    -and its way way deeper to the bottom than ours

    advise against overweight? thats a heluvan understatement!

  2. Jim67545 says:

    Pardon my ignorance but I do not understand what “credit impulses” or “credit cycle indicator” means. Can you provide some explanation?

  3. RW says:

    European elites seem, for the most part, to be doubling down on their austerity stupidity which will of course compound (pardon the expression) the negative impact of global economic slowing making Europe one of the least desirable investment options this cycle for sure and, if they don’t get their wits about them, the next cycle too. Lost decade, meet Europe.