A new report released Monday by BMO Harris Private Banking notes an improvement in the outlook for the eurozone and a continued advance in global equity markets.

“Coming into 2012, we identified the possibility of imminent default by Greece on its sovereign debt, and unsustainably high bond yields on other eurozone countries’ sovereign debt as the two major threats to equity markets,” says Paul Taylor, chief investment officer, BMO Harris Private Banking. “But, at this time, Italian and other eurozone bond yields are down significantly, and Greece has secured additional funding. When considered with improving U.S. economic data and continued strength in emerging markets, the result is more optimistic investor sentiment and positive equity market returns.”

The report notes that equity markets rallied last month. In February, emerging and international markets led the global equity markets with 4% and 3.8% monthly total returns. The U.S. equity market also did well; the S&P 500 index reached levels not seen since 2008 with investors encouraged by economic indicators signalling better U.S. and global growth ahead, decent corporate earnings and low interest rates. However, Canada’s equity market lagged global peers this month, returning just 1.7%.

U.S. stocks have benefitted from a U.S. economic recovery that has proven to be stronger than expected. U.S. Q4 real gross domestic product (GDP) was revised up to 3% and the full year 2011 growth rate was 1.7%. For comparison, Canada’s Q4 real GDP was 1.8% with 2.5% growth for 2011.

BMO Harris Private Banking says he optimism reflected in February’s equity market advance was due in large part to positive developments in the eurozone. On February 21, a new rescue plan for Greece was announced, allowing its government to make a €14.5 billion debt payment due in March.

The report notes that tensions in the Middle East, including a spike in oil prices, may impact equities and economic growth. Taking Iranian oil supplies out of the market would invariably tighten global supply at a time when spare capacity is scarce. From a current crude oil price of around U.S.$106 per barrel for West Texas Intermediate, such an upheaval has the potential to trigger oil price hikes to the U.S.$130-$200 level, based on previous historical price shocks.

BMO Harris Private Banking is cautiously optimistic that the eurozone situation will continue to improve and that the risks posed by the sovereign credit crisis will continue to diminish. Growth in the U.S. economy will continue, but at a moderate pace, given the headwinds posed by the country’s large stock of debt. That headwind will likely constrain economic growth in developed countries for years to come.

Meanwhile, equity market returns are expected to continue to outperform fixed income, with mid-to-high single digit returns.