Is Europe on the Verge of a Recession?

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Market Drivers March 22, 2019
EZ PMIs crater
Brexit uncertainty continues
Nikkei 0.09% Dax -0.05%
Oil $59/bbl
Gold $1310oz.

Europe and Asia:
EUR GE PMU Manufacturing 44.7 vs.48.0

North America:
CAD Retail Sales 8:30
CAD CPI 8:30
USD Existing Homes Sales 10:00

Horrible flash PMI data out of Europe rocked the FX market on the final day of dealing for the week, sending EURUSD 50 pips lower in less than an hour as traders started to fear that the region may be heading into a recession.

The flash PMI readings out of both France and Germany missed their mark by a wide margin with German Manufacturing PMI plunging to a 79 month low. The German PMI was already projected to print at 48 – below the 50 boom/bust line – but came in at a shockingly low of 44,7 suggesting that Germany’s key economic sector is now fully in a contractionary mode which likely to depress growth not only in Germany but through the whole of EZ as well.

German 10-year yields approached the zero bound level in frenetic morning trading as risk-off flows picked up markedly. The news only adds pressure on ECB not only to hold off on its normalization process but perhaps to completely reverse course and resume quantitative easing as credit conditions in the region have undoubtedly deteriorated.

The poor performance data from the EZ core economies also puts European authorities at a massive disadvantage at a time when they can afford it the least. The Trump administration has been threatening the EZ with import tariffs on cars which is a key industry in the region and would no doubt tip the continent into contraction should they be enacted. Mr. Trump – ever ready to trample his opponents when they are down, will no doubt harden his negotiation stance, adding further economic pressure on Europe.

All of this suggests that euro may now test the recent swing lows at the 1.1200 and could even head to 1.1000 as the year proceeds. This, in turn, should actually help the export-dependent region but the adjustment may take months and if exchange rates remain sticky at these level growth will no doubt deteriorate further.

For today, the battle in the pair will center around the 1.1300 level as longs will try to make a stand at that figure, but given the very weak PMI readings and the prospect of further declines in European export demand as US-China trade battle continues and the threat of US tariffs looms, it is likely we’ll see fresh lows in the pair as the day proceeds.

Boris Schlossberg
Managing Director

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