Markets would have hoped for more from the most recent round of economic indicators. The UK lurched back into recession, the US disappointed and eurozone purchasing managers’ indices (PMI) data showed even the previously untouchable Germany struggling to show growth.

Each country had individual problems. In the US, the biggest weakness was business investment, which will be a headache for President Obama as business investment drives job creation. In the UK, the biggest weakness was construction, though it should be said that many economists questioned the validity of the data – it conflicted with more positive signs from this part of the economy.

In Germany, the biggest worry was manufacturing data. To date, the country has helped shore up economic prospects in the eurozone. It has avoided recession thanks to low levels of unemployment and improved consumer spending, weathering a downturn in demand for its exports. However, its latest PMI data came in at 46.3 against an expected 49, with particularly weak demand from Southern Europe, suggesting Germany may struggle to fend off weakness in the remainder of the eurozone.

In France, which is currently facing a potentially radical change of leadership, the PMI indicator for services dropped even lower. It had been expected to remain at 50.1 and instead reported a level of 46.4. Composite eurozone PMI data was also weak, in a week when it emerged that Spanish unemployment is now running at almost 25%.

Some multi-managers have started buying back into eurozone markets although most continue to avoid the peripheral countries. They reason some great companies, relatively lightly exposed to eurozone economies themselves, are now trading at knock-down valuations. Hedge fund managers are, however, continuing their bearish stance on the currency.

The Financial Times reports that a clutch of hedge fund managers are betting directly there will be a much more serious crisis in the eurozone over the next few months. Among the euro bears is billionaire John Paulson, who has not always been right but whose views certainly merit consideration. He had suggested that a new crisis, centred on Spain, was imminent and Germany would be caught in the fall-out.

The eurozone situation looks bad, but perhaps a more important problem in the longer term is any persistent hike in the oil price. This has risen on the problems in the Middle East and is now certainly acting as a drag on economic growth, particularly in the US. Investors need to be aware of both problems and position their portfolios accordingly.

May 2012