Market update: Eurozone data disaster pushes ECB expectations even higher, a Great Purge in the UK

by Mihály Tatár

Good Morning!

• The positive sentiment remained supported by the Eurozone Data Disaster (SPX +0.47%, Nasdaq +0.85%, DAX +0.26%, Nikkei +0.36%, Shanghai +0.48%), which saw the German factory manufacturing index plunging to 43.1 (rapid contraction, this is the worst reading in seven years, worst than even the most pessimistic analyst forecast), with France’s index also dropping to 50 (stagnation, falling towards contraction). This reinforced the already very high market expectations that at today’s ECB meeting Draghi will announce easing in a dramatic fashion (the talk is a 10 basis point rate cut and bond-buying from September), sending the Euro and bond yields even lower (EURUSD 1.1130, German 10Y yield -0.39%, French 10Y yield -0.11%, Italian 10Y yield 1.49% (!), – these are numbers that one used to find on the wall of a Japanase pension club, really – with even regional currencies benefiting, EURHUF 325.30, EURPLN 4.25). Note that this the trading perspective. From a longer term perspective many are rightfully wondering, what positive difference another round of easing would make? The ECB has already become the world’s largest central bank in March by balance sheet – for this colossal amount of money, Europeans could have built a new EU capital hovering over a new EU army, or a base on both on the Moon and the Mars, but instead what we see is steady Eurozone underperformance ever since the financial crisis.  Does the ECB really think they can get away with sending the Euro near parity against the Dollar in Washington, or that changing the -0.40% deposit rate to -0.50% will unleash ’animal spirits’? (As several economists have observed, the negative rates actually forced consumers to save more, instead of making them consume more.) Furthermore, Berlin is now essentially running a country with a growth rate of zero with a budget surplus of 2% and with rates negative – any sane government would now spend heavily on infrastructure and technology instead of saving for ’hard times’ and green-killing its own core industries. Remember, as Eurozone companies are complaining, Brexit and the US-EU trade war haven’t even happened yet. Speaking of Brexit, Prime Minister Boris Johnson (spit! spit!) has began setting up his government, by replacing 17 ministers – this was described as Great Purge or Night of Execution by the media, because, you know, the new ones are real Brexiters and supposedly the fired semi-loyal-to-referendum ones were so phantastically successful.  (The Pound didn’t do too much since Boris’ nomination: GBPUSD 1.2480, partly because traders are waiting for actual developments between Boris and the new Brussels leadership and partly because of the selling of Euros against the GBP ahead of Draghi.)

Have a nice day,

Mihály

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