Equity markets look to be heading for year-highs again, although little has changed in risk from a sovereign debt perspective in Europe. It may be prudent to pontificate your next move from the beach, if you’re in the Northern hemisphere, and wait for a trend in equity markets to materialize. The last ‘correction’ lower was blamed on Greek default fears and the lack of austerity willingness of the Greek population. Since the massive austerity package was passed in Greek parliament and EMU/EU/IMF agreed on further credit to keep the country above water, the equity markets have rallied again. Has that much fundamentally changed to support such an appreciation? Prices CDS prices indicate the ‘indebted’ status quo remains intact and worrying, see chart 1. Adding further concern is the triad of EU/ECB/IMF starting to run out of ammo. Credit agencies are not convinced the latest attempt is the final solution for Greece and threaten rating Greek debt as defaulted even with the help of the trio. 
Taking credit market’s concerns into account when looking at the equity market, as in chart 2, leads us to an interesting quandary. 
The treacherous valuation trap entices optimists in equity markets to argue European stocks are a compelling BUY, see chart 3. Although we have experienced appalling macro data, both from the US and Europe, in June, little downward revisions in corporate earnings has been seen. If analysts start revising downwards, we may quickly see a change in the valuation levels across the market. 
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