Political show of hands carries on in the EU – Market Analysis – July 3

A cura di: Miguel A. Rodriguez

09:45, 14 settembre 2020

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Even though macro data shows improvement, the uncertainty of the EU COVID Rescue Fund, and national problems, put the EU future on shaky feet

A report of conflict within the European Central Bank related to the distribution of asset purchases that this central bank has implemented has been enough to curb optimism in European markets. 

EU Rescue Fund

At the moment, it is only an internal discussion about the specific weight that the asset purchase program should have in each of the countries. 

Currently, the ECB allocates a higher percentage of this program to countries with higher risk, such as Italy and, to a lesser extent, Spain. 

The representative of the Dutch Central Bank has spoken out today openly against the issuance of European bonds collectively and describes as temporary the current expansion and inclination of the asset purchase policy. 

All this internal noise does not help the recovery of the markets. Although it is most likely that everything remains in simple comments, it causes an increase in uncertainty since the market is currently susceptible to the monetary policy of the Central Bank and the stimulus policy of the European Commission. 

In the case of the European Commission, a meeting is scheduled for July 17-18, in which nothing has been decided at the moment. The reluctance of countries like the Netherlands, Austria, Denmark, or Sweden to grant unlimited funds to countries in need such as Italy and Spain is the main obstacle to its approval. 

Chancellor Merkel, in favor of this measure, has announced upcoming meetings in Berlin with Dutch leaders to advance in this regard. Any news of progress in this process will drive up both European indices and EUR/USD.

EU Political Crisis

Another news that has hurt European markets is the government crisis in France. Macron has dismissed the Prime Minister and has replaced Jean Castex.

All this occurs amid a market with fewer participants and less liquidity due to the United States holiday. This has led to a slight downward correction in the indices of peripheral countries, after a day of substantial gains.

Italy40 has dropped 1%.


Spain35 has also suffered similar losses. 


After confirming a clear trend towards economic recovery in Europe with financial figures that demonstrate it, such as those published today, EU Markit Composite PMI for June 48.5 vs. 31.9 of the previous month, and Spanish Services PMI 50.2 for June vs. 31.9 May, it is only necessary that the ECB continues its program without interference, either internal or from the German Supreme Court and the achievement of a favorable agreement for the implementation of the European rescue fund "next-generation,." 

This way, the European stock markets, especially those of Italy and Spain, obtain a strong bullish impulse that will make them recover a large part of the losses originated by the crisis of the pandemic.

The same is true for the currency, EUR/USD is within a trading range in recent weeks, unable to define a clear direction. This range is becoming narrower between 1.1190 and 1.1300, but with a certain upward bias due to the improvement of the European economic figures. 

However, it needs the political situation to be clarified so that this bias becomes a trend.

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