We see further tactical downside, but re-iterate our Stoxx 600 year-end target of 375
European equities have fallen by almost 5% from their mid-May peak (from 396 to 378). We think this pull-back has further to go, as Euro area PMIs fade from elevated levels and a strong euro weighs on European earnings. Our tactical Stoxx 600 model points to a local trough of around 360 by late October (around 5% below current levels). This is based on the assumption that: a) Euro area PMIs fall from the current 55.5 to 53.3 by year-end (consistent with 0.5% qoq GDP growth in Q4, or 2% annualised, in line with the recent upward revision from our economists); b) the euro trade-weighted index rises by a further 1% (in line with our FX strategists' forecasts); and c) real bond yields increase by a further 40bps (based on our fixed income strategists' rates projections). The expected drag from these factors is only partly offset by a projected further fall in Europe's political uncertainty index (from the current level of 220 to the 10-year average of 175) and a further rise in the oil price to $55/bbl (in line with our commodity analysts' projections).