* Slower money supply growth may herald euro stocks fall
* M1 indicator tends to lead PMIs, stocks, by 8-12 months
* Indicator peaked in April 2013
By Francesco Canepa
LONDON, Jan 30 Euro zone equity investors should
pay heed to a steep slowdown in money supply growth - history
suggests the indicator leads stock markets by around 12 months.
The two diverged last April, when money supply began to fall
and stocks kept rising. The latest data has exacerbated the
trend, which means equities could be ripe for a steep
correction, the following graphic shows:
The euro zone's M1 monetary aggregate, a leading indicator
of the economic cycle, grew at its slowest pace in two years in
December, calling into question a widely held view that the
currency bloc is recovering. Investor bets the euro zone is on
the mend have helped fuel a 20 percent rally in euro zone shares
The M1 money supply measure includes banknotes and coins as
well as deposits that can immediately be converted into cash or
used for cashless payments. It tends to lead Purchasing Manager
Index surveys of economic activity and share prices by 8 and 12
months respectively, Datastream figures showed.
A decrease in the money supply typically results in higher
borrowing costs, which in turn hamper investment and spending.
Last time M1 peaked, in August 2009, euro zone equities
began an 18 percent slide eight months later, the data showed.
David Man, a director at RMG Wealth Management, expected
weak economic conditions to hamper European shares in coming
"Europe as an economy still hasn't recovered properly and
still has major risks with it," he said. "At some stage in the
first two quarters we're going to see a peak."
(Editing by Catherine Evans)