On the data front, German factory orders declined by more than expected in June, while other economies are showing steep output cuts. Italian industrial production fell by -8.2% YoY and GDP showed a -2.5% YoY contraction in Q2. According to Geoffrey Yu, a Research Analyst at UBS, “Weaker growth underscores the difficulty for governments to hit current austerity targets, while this same muted growth in the Eurozone core may even pressure their governments to hold back on financial assistance.”
However, other risk assets are holding better as markets continue to respond to potential ECB action. “If anything, weaker growth numbers in the Eurozone opens the way for the central bank to act with greater force as sluggish activity presents greater challenges to its own price mandate.” Yu adds. Emerging market economies also seem to have stabilized, which suggests that the two key risk factors for markets - Eurozone crisis and a global slowdown - have subsided for now.