Is Eurozone Back in Trouble?

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Market Drivers Feb. 21, 2013
EZ PMI data misses sending EUR/USD through 1.3200
UK PSNB improves on BOE coupon payments.
Nikkei -1.39% Europe -1.47%
Oil $93.84/oz.
Gold $1569/oz.

Europe and Asia:
CHF Trade Balance 2.13B vs. 1.94B
EUR German PMI Manufacturing 50.1 vs. 50.4
EUR Euro-zone PMI Manufacturing 47.8 vs. 48.4
GBP Public Finances -9.9B vs. -9.0B

North America:
USD CPI 8:30
USD Philly Fed 10:00
USD Existing Home Sales 10:00
USD Leading Indicators 10:00

Its been a very strong risk off day in the currency markets so far as EUR/USD tumbled to fresh year to date lows of 1.3180 in morning European trade after a string of massively disappointing PMI reports from the region.

The French PMI Services report hit 42.7 versus 44.5 eyed as it reached a fresh 48 month low. French PMI Manufacturing improved to 43.6 from 42.9 but nevertheless fell short of 43.9 forecast.

In Germany the PMI Manufacturing report came in at 50.1 versus 50.4 expected while the PMI Services data declined to 54.1 versus 55.5 eyed. Overall the EZ flash PMI numbers also missed their mark with Manufacturing coming in at 47.8 versus 48.4 projected while services plunged to 47.3 from 49.2 expected.

Both Manufacturing and Service sectors remain well below the 50 boom/bust line indicating that EZ GDP will continue to contract in Q1 of this year. Some analysts have even predicted that the EZ growth will not turn positive until Q3 of 2013.

Today’s data stands in sharp contrast to the consensus market expectations that the region will see turnaround in growth as soon as Q1 of this year. The latest business sentiment surveys have lulled currency traders into thinking that economic conditions are beginning to improve, but today’s reports clearly signal the opposite.

So far the weakness in the economic data has not translated into any problems in the region’s credit markets with both Spain and France today able to raise funds at the upper end of their ranges. However, if growth continues to be negative for the first half of this year investor concerns are sure to surface even with the “implied put” offered by the ECBs OMT program. At very least if EZ periphery members are unable to generate economic growth and sustainable revenue to service their budgets, they may be forced to formally enter into the program. So far Spain has managed to avert this fate, but if conditions worsen may face the unpleasant prospect of doing so.

While most EZ officials and pundits have been patting themselves on the back, as they declared the EZ union to be secure, their celebration may be premature. Weak economic growth is sure to create massive backlash against austerity and may once again put a very serious strain on the union. Little wonder then that the EUR/CHF pair is starting to express those concerns as it slipped below the 1.2300 level in today’s trade.

With jobless claims and flash PMI readings of its own, the economic focus will shift stateside in North American trade. Markets are looking for little change in either data, but if the reports miss expectations and trigger another wave of risk off selling, the EUR/USD could test 1.3150 as the day proceeds.

Boris Schlossberg
Managing Director

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