Current thinking and media reporting on the eurozone’s economy is generally bullish, especially when compared with that for Brexit Britain. As reported on the Independent’s website earlier this year: "Eurostat said on Tuesday that the GDP of the single currency area expanded by 2.5 per cent in the calendar year (2017), the most rapid rate of growth since a 3.4 per cent expansion in 2007, the year before the global financial crisis broke. The eurozone is in the midst of a broad cyclical expansion, after years of economic stagnation and rolling crises, fuelled by recovering confidence and monetary stimulus from the European Central Bank."
They also mentioned that unemployment in the region fell to its lowest since 2009, 8.7 per cent, down from a peak at 12.1 per cent in 2013. (Incidentally, Germany’s also peaked at 12.1 per cent in 2005). There is huge disparity among nations, Greece at 20.5 per cent, Spain 16.7 per cent, Italy 11 per cent, France 9.2 per cent – Germany just 3.6 per cent. UK ILO unemployment today is 4.3 per cent and the labour force participation rate at 75 per cent of 16 to 64 year olds, a new record.
So, you see, good and bad are relative terms and beauty is in the eye of the beholder. This week we look at long term charts for key elements of the eurozone’s outlook, starting with the fact that the European Central Bank’s key rate is still set at minus 40 basis points – where it has been for two years. Sovereign bond yields reflect this extreme, Spain’s 10-year paper yielding just a tad over 2016’s record low of 0.865 per cent. If everything’s so rosy, why are rates this low? Interest rates should remain exceedingly low for quite a long time yet.
Interestingly the euro (currency) has not weakened because of the interest rate differential – against the US where the Fed Funds target is 1.50 to 1.75 per cent. It has recovered one-third of what it lost since the third quarter of 2008, rallying for five consecutive quarters in a clear bullish channel. The rally is intact and we would expect a move up to the halfway point between 2008’s peak and 2017’s low – the $1.3200 area.
Turning our attention to stock markets, readers should be aware that of the major eurozone ones we track only Germany’s Dax hit a new record high this year; the others are trading under earlier peaks set in 2000, 2007 and (for some) 2015. Looking at Paris’s CAC 40 index of leading shares we can see that the cult of the equity came later than in the UK and US, when secular bull markets started in 1982 – and Japan’s Nikkei 225 peaked in 1990. We can see that the index has struggled at the 5300 area for a whole year. The longer this continues, the smaller the chance of an upside break because it has already failed near here three years ago. The picture for Italy’s MIB 40 is far grimmer, trading at less than half of 2000’s peak, dragged down by non-performing loans at its banks
Talking of which, note that our final chart is the share price of Germany’s biggest, Deutsche Bank, the one that Bloomberg says had "ambitions to go head-to-head with Goldman Sachs". Paraphrasing: to own a small bank buy a big one – and wait!
