UBS believes Eurozone can avoid macro-slowdown

Current market pricing was suggesting investors were overly pessimistic on the risk of Europe entering a "major macro-slowdown", having taken a more negative view towards the severity of the problems within the financial sector, UBS said on Friday.

Markets appeared to be worrying the situation of lenders might negatively impact that transmission channel for credit to the wider economy, the broker's economist Reinhard Cluse said in a research note sent to clients.

There was also a sneaking suspicion on the part of investors that the European Central bank might be running out of options to prop up the economy.

"We remain reasonably confident that Europe can avoid a major macro slowdown, but current market pricing suggests otherwise," Cluse explained.

So where might markets be right, Cluse asked rhetorically?

Investors' gloomy assessment could be based on a more pessimistic assessment of external risks, such as those from China, emerging markets and the US, European politics or the negartive wealth effects that the market sell-off might have on the Continent's growth prospects, the economist said.

Nonetheless, in his opinion fiscal stimulus, low oil prices and real wage growth could provide support to domestic demand, thus avoiding weakness in the industrial sector from spilling-over into services.

UBS stuck to its forecast for euro area gross domestic product to expand by 1.6% in 2016 and 1.7% in 2017, following growth of 1.5% in 2015.