So, How Much More Negative Can Markets Get on the EuroZone and the Euro?

01/05/2015 5:32 pm EST


Jim Jubak

Founder and Editor,

This time around, even actual action might not be enough to turn the EuroZone economy around and MoneyShow’s Jim Jubak suspects the pessimistic trend will persist at least until the markets see what the ECB promises on January 22.

It’s hard to imagine that sentiment could get more negative on the EuroZone economy and the euro than it is this morning.

But I think the pessimists are still in charge and likely to get even more pessimistic in the days that lead up to the next meeting of the European Central Bank’s governing board on January 22.

The big news item this morning is that inflation in Germany, the biggest economy in the EuroZone, fell to a scant 0.1% in December. That’s lower than the 0.2% inflation expected by economists surveyed by Bloomberg and the lowest rate since October 2009.

Combined with the data coming in from other EuroZone economies, the German figure is likely to be enough to push the whole EuroZone into deflation. Last week, Spain reported that prices fell 1.1% year-over-year in December. Economists are now projecting 0.1% deflation in prices for the entire EuroZone economy when figures are reported on January 7.

Frequently, numbers like this in past months have led to a move up in European stock prices as traders bet that bad news on inflation/deflation increased the odds of more stimulus from the European Central Bank. The bank is scheduled to discuss a Federal-Reserve-style program of asset purchases—including purchases of sovereign debt—when it meets on the 22nd.

This time, though, that scenario hasn’t been enough to push European stocks higher. As of the close, the German DAX index was down 2.99%, the French CAC 40 was lower by 3.31%, and the Spanish IBEX 35 was off 3.45%.

The euro was down another 0.56% to $1.1935. That drop is closing on the 52-week low of $1.1864.

The difference this time seems to be a result of worry over upcoming Greek elections, which could result in a victory by the Syriza party. Syriza has called for renegotiating the country’s bailout package by rolling back cuts to the government workforce and spending on pensions, and by writing down the value of Greek government debt. That could, the markets seem to feel this morning, lead to a Greek exit from the euro. And since the rules setting up the EuroZone don’t include any provision for a member’s exit, no one knows what a Greek exit might mean.

Just as important, though, is increasing skepticism that even a big program of asset purchases would turn around the EuroZone economy. Representative of that skepticism is the big front page headline in today’s Financial Times: Massive QE not enough to revive eurozone, economists warn. The story itself goes on to quote a number of economists saying that growth and inflation will remain dangerously low even if the European Central Bank does agree to buy lots and lots of assets.

In the past, the financial markets in Europe have been willing to rally just on a promise from ECB President Mario Draghi to do “whatever it takes.” This time, the doubters are saying, even actual action might not be enough to turn the EuroZone economy around.

I suspect this pessimistic trend will persist at least until the markets see what the bank actually promises on January 22.

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