We see no further upside for European equities for the rest of this year. While the weak May US payrolls report has lead to a dovish re-pricing of Fed expectations and reduced the risk in the near-term of re-entering the “doom loop” from a more hawkish Fed to a stronger dollar, lower oil prices, high HY credit spreads and lower equity markets, we
remain concerned about the growth picture. Chinese credit stimulus continues to fade and weak US corporate profits translate into reduced hiring and investment, meanwhile, fragilities in the US high-yield credit market continue to intensify with the 12m trailing default rate up to 5%, a new cyclical-high that is not being reflected in the current level of US HY spreads. We believe that these issues continue to significantly undermine the upside case for European equities from current levels.