Eurozone Economic Prospects Will Undermine Euro Index

Intermediate
  • Key members of the Eurozone crash into recession
  • Business and consumer sentiment evaporated
  • Every nation/region of the world faces a deep economic dislocation
  • None more so than the Eurozone; the long game is not Euro Index friendly

Kaputte Wirtschaft (Broken Economy)

Germany is the leading economy of the Eurozone accounting for 28.25% of the regions output. In this past week the Federal Statistics Office reported that Germany’s economy shrank 2.2% QoQ in Q1 2020, following a 0.1% decline in Q4 2019. Thus, Germany entered a recession.

This was the largest contraction in the level of German GDP since Q1 2009 and ranked as the second deepest decline since German unification on October 3, 1990. Of course, much of this is a result of the action taken to contain the coronavirus pandemic that has required many businesses to shutter and people to stay at home.

Private consumer spending dropped sharply as the consumer sentiment indicator for Germany plunged to -23.4 as May began. This was shy of the market consensus of -1.8 and was hot on the heels of a downwardly revised 2.3 in the prior month. No sugar coating here, it is the lowest reading on record.

Given that the Ifo Business Climate indicator for Germany dropped to 74.3 in April 2020, from a y revised 85.9 in the previous month and was below market expectations of 80 it is no surprise that investments in equipment, particularly in machinery, equipment and vehicles collapsed.

Même histoire en France (Same story in France)

The tail of economic distress is not just restricted to Germany. In France (19.76% of Eurozone GDP), the economy suffered the steepest decline in Q1, shrinking by 5.8% after a decline of 0.1% in the previous quarter. So, France too is in a technical recession and again the decline was the steepest ever booked according to INSEE.

There were declines in household consumption -6.1% cf. 0.3%, led by falls in spending on both goods and service; fixed investment -11.8% cf. an unchanged observation, led by construction; and government spending -2.4% cf. 0.5%. In addition, net foreign demand contributed negatively as both exports and imports fell.

Non dimenticare l’Italia (Do not forget Italy)

Italy accounts for 14.87% of the Eurozone’s economy and it contracted by 4.7% in Q1 after a 0.3% fall in the last three months of 2019. AS is the current pattern, it was the steepest contraction since comparable records began to be recorded by ISTAT in 1995 although it was marginally better than market expectations of a 5.0% decline. It seems the market will grab any shred of good news.

Of course, Italy has been badly hurt by the coronavirus pandemic during March. The economic evidence is seen in the production numbers as severe contractions were seen in all main industries: agriculture, forestry and fishing, industry and services.

From the demand side, both the domestic and external demand contributed negatively to the GDP. Year-on-year, the economy contracted 4.8%, the most since Q3 2009 and following a 0.1% expansion at the end of 2019.

Eurozone Economy Evaporates

Taken as a bloc, the Eurozone saw an economic contraction was confirmed at 3.8% in Q1 2020. This is the steepest measured by Eurostat since comparable records began in 1995.

What is beginning to emerge is a realisation that growth in the Eurozone is going to take longer to recover than previously expected, as the fallout from coronavirus means one should expect a deeper contraction and a more sluggish recovery. One can kiss goodbye to any “V” shaped recovery in Europe. It will more like an extended “U”.

This will because of longer lasting dislocation effects as such consumers and corporations will remain overly cautious and sadly some firms will not reopen. It is with sadness that I notice Business Confidence in the Eurozone decreased to -1.81 points in April from -0.28 points in March of 2020. The sixth consecutive month of a sub-zero reading.

Looking at the Euro Index

My last post was about the EURUSD. This time I am taking a broader sweep by looking at the Euro Index. This is used for the analysis and trade of the Euro against the rest of the forex market in the guise of a portfolio of most liquid currencies EUR, USD, JPY, AUD, CHF, and CAD. It is used as a market systemic indicator.

It is a steady gauge on the fundamental events of the Eurozone and the sensitivity to fundamental events in other currency zones is minimal. This allows a low-volatility trend movement of the index that quantifies with superb objectively the state of Eurozone.

Euro Index Long Chart
Euro Index 12 month chart

The orange circle in Figure 2 illustrates that the closing spot price of 100.29 is close to the 50-day moving average at 100.18. Even though the economies of the other currencies in this index are experiencing coronavirus issues themselves, the combination of economic decline, a lack of collective regional effort and debt disasters in three to five years’ time tells me the Eurozone and the Euro are heading for a rocky ride.

I expect the Euro Index to rotate back inside the recent impulsive channel with a decline to 96 as this dreadful year unfolds.

As I am taking a long view on this play I have opted not, at this time to have any set stop loss set in place. That must be an evolving matter.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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