Eurozone equity markets have declined in step with global markets in a widely expected market correction. While there has been some recovery in the first two days of this week, it is not yet clear that the correction has run its course. Concerns that interest rates in both the United States and Europe will rise faster than had earlier been expected appear to have been a trigger, with technical factors amplifying market swings. Following a correction in early 2016, equity markets climbed steadily, until they fell off the cliff at the end of January. The market gains in 2017 were exceptional. The US equity market gained 21.8% as measured by the SPDR S&P 500 ETF, SPY; and equity markets outside of the US gained, even more, 27.8%, as measured by the iShares MSCI ACWI ex US ETF, ACWX. A correction was long overdue.

Eurozone equities peaked on January 26th in sync with the U.S. and other major markets. In most cases, however, the subsequent declines in the Eurozone were more moderate. While SPY was down 2.02% year-to-date at the end of last week, the iShares MSCI Eurozone ETF, EZU, lost 1.24%. Several Eurozone markets performed considerably better. The iShares MSCI Spain Capped ETF, EWP, declined only 0.31%; the iShares MSCI Belgium Capped ETF, EWK, still had a positive year-to-date return of 1.90%; and the iShares MSCI Italy Capped ETF, EWI, registered a 4.14% year-to-date gain. German equities, in contrast, underperformed. The iShares MSCI Germany ETF, EWG, was down 2.85%. Monday Eurozone equities followed the recovery in the US and Asia but then fell back a bit on Tuesday. Market volatility remains high.

Fundamental factors suggest the lengthy bull market in Eurozone equities still has legs. The future prospect of higher interest rates represents the greatest risk to this outlook. The European Union has raised its growth forecast for the Eurozone economy in 2018 to 2.3%. Recent strong data for both industrial production and retail sales support this forecast. One of the best leading indicators, the HIS Markit Eurozone Composite Purchasing Managers’ Index (PMI), stood at 58.8 for January, the highest reading for this indicator since June 2006. Economic output growth was strong in all the major Eurozone economies, with France registering the strongest growth and Germany, Italy, and Ireland close behind. Business confidence is reported at an 11-month high.