Swiss & Global dampens momentary relief in markets

Swiss & Global Asset Management has cautioned investors not to become too euphoric over supportive comments from European Central Bank president Mario Draghi on Wednesday he would unveil what many consider the ‘big bazooka’ to save the euro.

Stefan Angele, head of investment management at the Swiss-based manager said it was “increasingly clear” that eurozone GDP would shrink by between 0.5% and 1% this year, “which will be a drag on the speed of fiscal consolidation in the region and might lead to a further intensification of the debt crisis”.

As gold traded above $1,615 per troy ounce, suggesting heavy risk-aversion among multi-asset investors, Angele said confidence in Spain’s economy – the bloc’s fourth largest – is “continuing to suffer’, while news Moody’s was lowering its outlook on Europe’s bailout fund was also negative.

Moody’s cut its assessment after Germany, holding a near-20% share in the EFSF guarantor pool, plus the Netherlands and Luxembourg all had their outlook downgraded.

Angele said “a weakening of the commitment to the EFSF among euro area member states could have negative rating implications”.

He added any centralized bailout of Spain by the fund would “little to provide assistance to other eurozone members”.

Despite Draghi’s fighting words on doing whatever is required to save the euro, leading markets to jump yesterday, the immediate fate of the trading bloc’s peripheral members is unclear.

Spain’s recession sharpened last quarter, when the economy contracted by 0.4%, for the third quarter running, according to the Bank of Spain. Domestic demand fell though exports recovered slightly.

Angele said July’s Flash Purchasing Managers Index, which at 46.4 was unchanged month on month and in the contraction zone below a reading of 50, suggested the euro area’s economic downturn “seems to be worsening”.

“The manufacturing component of the index was particularly ugly, falling at the steepest rate since May 2009,” Angele said.

“The flash PMI for July suggests the euro area downturn, and showed no signs of easing at the start of the third quarter. In fact, it is consistent with GDP falling at a quarterly rate of around 0.6%, which is similar to the rate of decline we expect to see for the second quarter.”

Even German business has been hit last month, as the Ifo institute’s barometer of business conditions fell more sharply than expected.

The Ifo’s report came on the heels of PMI numbers from Markit that Angele called “disappointing, showing Germany’s manufacturing and service sectors are contracting. Expect the eurozone crisis to further dampen the outlook for economic growth and company earnings.”


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