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GOLDILOCKS RETURNS TO EUROPE, BUT OIL'S THE SPOILER

European investors have turned more optimistic on growth and markets, with Bank of America's July survey among the region's fund managers showing a "Goldilocks" backdrop of solid economic growth and easing inflation has become the dominant view for the first time since October 2024.

A net 37% of respondents expect such an environment over the next three months, up significantly from 3% in June, while a net 54% forecast a stronger European economy over the coming year, compared with 11% last month.

But oil prices remain a potential spoiler. "Goldilocks emerges, but geopolitics needs to align," write Bank of America strategists including Paulina Strzelinska and Andreas Bruckner.

The survey was carried out between July 3 and July 9, after a temporary ceasefire ended the U.S.-Iran conflict but largely before hostilities flared up again, helping push oil prices back to one-month highs on Tuesday.

That helps explain why Middle East instability remains investors' biggest geopolitical concern, cited by 43% of respondents. "Energy prices and Inflation are considered both the biggest upside risk to global growth (if they decline) and downside risk (if they rise) by a wide margin," the strategists add.

Despite those concerns, investors have become much more bullish on equities. A net 54% expect European stocks to rise over the next few months, versus 4% expecting declines last month, while those expecting gains over the next year rose to 91% from 71%.

Banks are the largest consensus overweight, cyclicals are back in favour and Germany remains the preferred market. Yet, "a hawkish central-bank response to an upside inflation surprise (31%) is the most likely catalyst for a market correction."

(Danilo Masoni)

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