2013 Outlook, Part 3 – Euro Area

by Pater Tenebrarum
Acting Man

It Is Not All Bad Actually, But …

Markit has just released the final PMI data for the Euro Zone, Germany, France (all files in pdf format) and others, and they essentially confirm the message from the ‘Flash PMI’ data discussed here. Things continue to look bleak and the euro area remains mired in recession. However, we would point out that not everything is bad. For instance, with the exception of Italy, most euro area peripherals (most notably Spain) have managed to narrow their ‘competitiveness gap’ with Germany considerably. Bank borrowings from the ECB have declined slightly even in Spain, bond yields and CDS spreads remain tame in the wake of the ECB’s ‘OMT’ announcement. We would note to this that given how late the ECB was to the party every time, its interventions may have merely reinforced what the markets were about to do on their own anyway. There is of course no way of ascertaining to what extent the move lower in peripheral sovereign bond yields was due to the interventions and promises of the ECB and to what extent the previously very high yields attracted buyers motivated by the apparent opportunity. However, given the vast expansion in government bond holdings of e.g. Spain’s banks, we are inclined to mostly blame the intervention effect.

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