EU Economic Update – 11 May 2015
European data remains off kilter as developed economies wobble; markets correct on inflation rebound
The core headline event in European markets over the last fortnight has been a broad based correction across all asset classes that had previously benefitted from the ECB’s QE program.
This saw long dated German bonds undergo their heaviest sell off for nearly two decades while the German equity index, the DAX, shed nearly 10% of its value during the second half of April.
Despite the disproportionately harsh impact upon European assets, the recent sell off is something that has not been isolated to the continent alone as both UK and US markets have also experienced bouts of weakness of late.
In a similar manner as to the US economic slowdown there appears to be a distinct lack of consensus among the analyst community as to what actually caused the sell off although, in our own view, we believe that the most likely culprit is a rebound in inflation back to the breakeven 0.0% level.
This may have caused some investors to reassess the ECB’s commitment to an extended program of easing and in doing so, prompted some level of profit taking.
Looking ahead we note that oil benchmarks have recently reached new highs for 2015, with Brent almost touching noses with the $70 price level and WTI trading above $60 for several days. Should prices remain at or close to these levels then we could see more of the same uncertainty over both inflation and monetary policy during the months ahead.
However, we also note that in contrast to the usual precursors of rising oil prices and rising consumer prices, the current environment is one of remarkable uncertainty when it comes to economic growth across Europe and the rest of the developed world.
This has been emphasised by disappointing GDP figures for the developed economies in Q1, waning consumption among consumers and lagging activity across some segments of industry.
We do not expect unease over this level of uncertainty to shift far from the fore over the months ahead and for this reason, we feel it is more likely that the ECB will a) continue with its easing program through into 2015 and b) repeatedly reaffirm its commitment to continue with loose policy at least until September 2016.
This should be enough to put a firm floor under European asset prices for the time being.
Looking to the week ahead the key events in the economic data calendar on the continent are another round of euro-group (no new news expected) meetings followed by the release of German GDP (risks to the downside) figures for Q1.
Selected EU Indices (DAX, CAC40 & IBEX)
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