Summer lovin" fades for euro stocks European equities" rally has been more of a fling compared with Danny Zuko and Sandy Olsson's romance in "Grease" "Summer fling, don't mean a thing, but uh-oh those summer nights," sang John Travolta and Olivia Newton-John in Grease. It could have been an anthem for European equity markets. The summer's rally, triggered by European Central Bank pledges to take whatever steps needed to save the euro - and US Federal Reserve attempts to stimulate the US economy - has cooled noticeably this week. Since June, the FTSE Eurofirst 300 index has outperformed the S&P 500 and global share indices. But it has failed to make good its underperformance since the start of the year. By Friday the mood had turned distinctly autumnal, with the index barely higher than a week before. "You get moments of euphoria, when the clouds seem to clear - but then the fog returns," says Nick Nelson, European equity strategist at UBS. Immediate worries have focused on Europe's bleak economic outlook and hitches in the ECB's euro rescue plans. Italy's government this week cut sharply its 2012 growth forecast, while purchasing managers" indices showed eurozone private sector activity contracting at the fastest pace since 2009"s deep recession. Meanwhile, Spain has yet to agree an economic reform programme with EU authorities - the prerequisite for ECB intervention in its bond market. The yield on a Spanish two-year bond, a yardstick of investor sentiment towards the eurozone which fell sharply over the summer, has risen 40 basis points since Mario Draghi, ECB president, unveiled his bond buying plan on September 6. Italy's FTSE MIB index, one of the summer's stellar performers, ended the week down 3.8 per cent, Spain's IBEX index showed the smallest weekly gain in a month. Underlying concerns about Europe, only partly masked by the recent rally, have been reflected by a slowdown in equity trading. As share prices rose during the summer, European trading volumes slumped to the lowest in 12 years. With the market for initial public offerings also weak, a pick-up in September was not sufficient to prevent a European jobs shake-out at banks such as Japan's Nomura. "I think our market is impaired - there are too many competitors and we have clients who are not prepared to pay the fees that are necessary to sustain the infrastructure," says Craig Coben, head of European equity capital markets at Bank of America Merrill Lynch. Sharply slower trading is a global phenomenon, but Europe has been arguably harder hit than the US as, in value terms, the fall was from a lower starting point. The average daily value of US stock trades fell to $152bn between January and August, from $180bn in the same period a year before, according to Credit Suisse Trading Strategy. Europe saw a drop from $57bn to $39bn. "It was a narrow rally in terms of the people backing it," says Adam Young, co-head of equity capital markets at Rothschild. Andrew Milligan, head of global strategy at Standard Life Investments, adds: "Most of what is happening is people closing down positions - if, for example, they were short on Europe. But I don't think people have been taking long term positions. Since the start of the year, European equity funds have seen outflows equivalent to 3.6 per cent of assets under management, according to EPFR, a fund data provider. That went sharply into reverse in the past three weeks - but US investors have accounted for most of the $2.2bn net inflows. "The Americans seem to be making more out of the ECB's actions than the Europeans," says Cameron Brandt, head of research at EPFR. Navigating the uncertainty has become harder. If trading volumes are thin, then the aggregate indices can be more volatile and it may change their signalling effect. It makes us more cautious," says Mark Parry, senior investment manager at Aberdeen Asset Management. When there are no clear trends,"people start to hug the index due to higher downside than upside," says Detlef Glow, head of Lipper Emea research. Will sunnier times return? European shares are trading at a price to forward earnings ratio of about 11 - which makes them still look cheap compared with the long run average of about 13. Robert Farago, head of asset allocation at Schroders Private Bank, reckons that if the ECB prevents Spanish two-year bonds creeping higher than previous peaks, "then the underperformance of Europe relative to the US should have troughed too." Even if long-term scepticism about Europe's future remained justified, "this leaves scope for positive surprises." Still, few expect a dramatic improvement any time soon. "To get a sustainable re-rating of P/E multiples you would have to see risks of a eurozone break-up priced out completely and some sort of debt mutualisation across the bloc," says Mr Nelson at UBS. Risks remain, including further economic deterioration across much of southern Europe or Greece's possible exit from the eurozone. Elections loom in Germany and Italy next year. "If you want to worry about Europe," says Mr Milligan, "there are more than enough characters and events out there."