Arnaud Masset
Swissquote Bank Ltd
The latest batch of European data does not paint a bright picture of the economy. The first signs of weakness came from German when manufacturing PMIs dropped below the 50 threshold and economic growth contracted in the second quarter. On the other hand, it seems that the weakness was contained to Germany as France, Portugal and even Spain appeared surprisingly resilient. However, some cracks are appearing in the other economies as well, especially in the industrial and manufacturing sectors. In July, Italy’s industrial production contracted 0.7%y/y (versus +0.3% expected and -1.2% in June), France’s gauge fell -0.2%y/y (+0.5% exp. and -0.1% in June), while the German one dropped 4.2%y/y compared to -3.9% forecasted and -1.1% in the previous month. However, this weakness may be due to temporary factors, it is still too early to determine.
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The market is waiting for the ECB bazooka stimulus that should be announced on Thursday. The recent weakness, together with the collapse of inflation expectation - 5y5y swap rate fell to 0.99% compared to 1.59% at the beginning of the year – clear up any doubts that the ECB will under deliver. We are convinced that the ECB announce the full package, i.e. 20bps cut to the deposit rate and a return to QE on corporate and sovereign debt with substantial buying. Against such a backdrop, the euro should experience further weakness; while equities should get a boost (one should remain careful with banks, though).
This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.
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