European Markets Are Going Crazy
Below is a quick rundown:
- France: +2.9%, banks +5.7%
- Germany: +2.1%, banks +4.0%
- Spain: +2.7%, banks +4.5%
- Italy: +2.0%, UniCredit +4.0%
Last week, there were rumblings out of the Bundesbank that the ECB could be preparing to cut interest rates should further deterioration in the economic data warrant such action.
This morning, with German PMI falling to a 5-month low – indicating a deepening contraction in the German manufacturing sector – markets seem to think this will provide exactly the impetus that Bundesbank President Jens Weidmann hinted at last week.
In his morning note to clients, Miller Tabak's Andrew Wilkinson writes:
The conclusion to the glum tale of tepid world demand is that the ECB is now more likely to attempt to spur a turnaround by dropping its main repo rate at the forthcoming meeting at the start of May.
And before you ask the question of us about what good that might do, we should also point out the important words aired yesterday by EC President Jose Manuel Barroso who warned that Europe may have reached the political limits of austerity due to growing opposition around the recession-hit periphery.
Although he backed sweeping economic reforms and budget cuts, he said that a properly designed policy stance must have a “minimum of political and social support. “ Further weak data from the eurozone could provoke leniency on peripheral nations to loosen their belt in terms of ongoing austerity.
The question is when the leading member (Germany) will recognize that budget deficit reduction is proving more counter-productive than it is delivering good. Easing up or acting to provide stimulus would equally prevent the German manufacturing powerhouse from sliding back into recession.
The ECB announces its next rate decision at its monthly policy meeting on May 2.