Investor sentiment towards euro area collapses in June, Sentix says

Doubts around the new government in Rome have led investors to downgrade their expectations for euro area growth back to the levels last seen in August 2012, when European Central Bank chief Mario Draghi famously promised to do "whatever it takes" to stem the rout in euro area periphery debt markets.

The Sentix Institute's investor confidence index fell from a reading of 19.2 for May to 9.3 in June, its worst reading since October 2016.

In parallel, a sub-index linked to their expectations for the single currency bloc "collapsed" from -2.0 to -13.3.

"Now they are here, the American punitive tariffs. So far, this has done less harm than one might think to global economic expectations. It appears that investors still hope that the world's trade dispute with the US will not get out of control," Sentix said in a statement.

"Investors, on the other hand, are far less lenient with developments within the euro zone. The new government in Rome is very sceptical. This is so strong that economic expectations in the euro zone are downright tilting."

Sentix conducted its survey of 920 investors - including 247 instititutioonal ones - between 31 May and 2 June.

A separate index tracking investor sentiment towards Germany retreated from a reading of 23.5 in May to 18.5 for June - its weakest level since July 2016.

Thanks to the Trump administration's recent tax reforms on the other hand, sentiment to the US continued to be at robust levels.

Nonetheless, Sentix cautioned that America was not "invulnerable". Indeed, the subindex tracking expectations for the US continued to be in the red, retreating from -4.8 to -6.5.

"The US economy is by no means invulnerable. The special effects of the tax reform and deregulation measures currently cover the burdens resulting from rising interest rates and declining money supply," Sentix said.

Economic expectations for Asia ex-Japan on the other continued to be positive, although the corresponding subindex did slip from a reading of -4.8 to -4.0.

"We believe that the Asian region remains the global hope. It is the only region of the world that still has positive economic expectations. This is probably due to the prudent attitude of the Chinese government to date. On the one hand, it cooperates with Trump in North Korea, and on the other hand, it is pragmatic on trade issues. Investors reward this policy in the sentix economic indices," Sentix added.

Commenting on the data, Claus Visten at Pantheon Macroeconomics said: "The survey is conducted in the first week of the month, so investors had the jump in Italian 2-year yields fresh on their mind when they responded. The expectations index was even worse than the headline, plunging to its lowest level since the last recession in 2011/12 at -13.3.

"The dive in the Septic expectations index means the ZEW survey almost surely also will be downbeat, and it raises risks for a further dip in the IFO. That said, investor sentiment data tend to overshoot based on sudden volatility, compared to the economic surveys. Finally, investors’ expectations ought to rebound swiftly if the deterioration in Italian bond markets doesn’t escalate."