Market Commentary: French economy fails to grow, Hollande says ECB has role in tackling economic sluggishness

Markets are trading higher this morning despite negative data hitting the markets. China’s and India’s Purchasing Managers’ Index (PMI) came in worse than expected and Germany’s gross domestic product shrank 0.2%. The reason for this ‘positivity’ is the increased anticipation of some form of quantitative easing from the ECB in its meeting on 4th September.

Last week we saw that the Eurozone inflation for August increased by just 0.3% and unemployment remained at a high level of 11.5%. Investors are betting on a US style form of quantitative easing in Europe. A growing number of economists, including those from BNP Paribas SA, JPMorgan Chase & Co. and Nomura Holdings Inc. are also expecting the ECB will cut interest rates when it next meets next Thursday.

Draghi had said if the inflation remains a threat in the medium term, the ECB will move to a US style of quantitative easing. And the markets are rallying on this. Since 8th August, European markets like the DAX (German market) and the CAC (French market) have rallied 6% from their lows.

We are also seeing signs of the market expecting quantitative easing from the ECB from the tightening in yields on European sovereigns and the weakness in the Euro when compared to a basket of currencies particularly the USD. The Euro lost 6% to the USD from May of this year. A weakening Euro is positive for European companies because it makes their products cheaper to sell overseas. The strength of the Euro was a major concern to European companies in 2013. Not only did European companies have to deal with poor growth rates in Europe, but they also had to suffer from the strength of the Euro.

Though with the Fed pulling money out the economy and the ECB expected to pump money back in, we expect to see a rotation in the way the central banks influence their economy. In the US we are expecting the Fed to ‘pull out’ of the markets gradually as the growth in the US seems to be sustainable. Whereas in Europe, economies need more intervention of the ECB in order to get their economy running.

However, Germany continues to be against quantitative easing because it doesn’t believe that the ECB should be the institution to solve the problems of peripheral Europe in the short term. That contrasts with French President Francois Hollande, who said that the ECB has a role in tackling Europe’s economic sluggishness. Italian Prime Minister Matteo Renzi has proposed that leaders of the 28 EU countries hold a summit on growth in October.

France’s economy has failed to grow in the last two quarters and the government in August tore up plans to reduce the budget deficit to 4 percent of output this year. Italy is in its third recession since 2008. This time is it different though because the data coming out of Germany is not encouraging and we are beginning to see a Germany which is suffering due to the slowdown in peripheral Europe.

Moving on the Russia-Ukraine conflict, the situation is worsening though the markets are putting this on the back burner and focusing just on one thing – the 4 September meeting.

The bottom line is that investors are building positions to get exposure to the markets despite all the negative news coming out at the moment. And they are doing so because they believe that the ECB will help governments and companies solve part of their problems in the short term. Considering equities continue to provide attractive returns compared to other asset classes, investors are building positions on the dip to hopefully ride the rally when things start to improve.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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