Economic malaise in the Eurozone stays on the headlines even today (3/3). Mixed PMI data, as well as the third consecutive under zero inflation and negotiations with Greece, maintain uncertainties in the region. The Eurozone is still the biggest risk in the market now.

Economic malaise in the Eurozone stays on the headlines even today (3/3). Mixed PMI data, as well as the third consecutive under zero inflation and negotiations with Greece, maintain uncertainties in the region. The Eurozone is the biggest risk in the market now, and it shows.

 

1. Mixed Manufacturing PMI

Markit Economics reported that Manufacturing PMI in the Euro Area was unchanged at 51 in February, the exact figure with the one in January, but with different details. In the recent release, France continue to be the biggest drag in the area, with Manufacturing PMI at 47.6 versus flash 47.7 and further job cuts the country. Meanwhile, Ireland improved best with Manufacturing PMI at more than 15 years high in 57.5. Ireland also led jobs growth along with Italy and Spain.

EurozoneA Comparison of Eurozone Countries' Manufacturing PMI From 2011 Till February 2015

Chris Williamson, chief economist at Markit, denoted that, ...different parts of the manufacturing economy are clearly moving at very different speeds, ranging from a Celtic boom to a Gallic slump. The report clearly shows how Ireland and Spain experience growth, while German, Netherlands, and Italy stay mediocre. France, Greece, and Austria remain in the slow lane as downturn sharpened in France. However, he maintain an optimistic view, Coming months will hopefully see all countries’ manufacturing sectors pick up speed, as business and consumer confidence is buoyed by ECB stimulus. The recent fall in the euro should also provide a noticeable stimulant to export sale.

 

2. Third Consecutive Deflation

Inflation rate in the Eurozone continue to stay under zero in the year-to-year data, as shown in the Eurostat release late yesterday.

EurozoneBelow-zero Inflation Rate In The Eurozone

Inflation rate rose slightly from -0.6 to -0.3 in February, a better-than-expected figure that expresses lessening deflationary pressures. Nevertheless, it needs to be noted that this is the third consecutive deflation, and the longer price growth stay under zero, the harder it will be for Euro to step on to the road of recovery.

 

3. Negotiation for Greece Third Bailout Underway?

After Greece proposal to extend bailout for four months accepted by the Eurozone last week, some of us would have guessed, That's it for now. We'll see the next part of the drama on, maybe, around June. What a mistaken assumption.

Spanish Economy Minister, Luis de Guindos, said at a conference on Monday that the Eurozone is negotiating third bailout with Greece that will give the country 50 billion Euros (56 billion USD). However, spokeperson of Jeroen Dijsselbloem, chairman of Eurogroup finance minister, and a Greek finance minsitry official, reportedly denied the presence of such talks.

The deal between Eurozone and Greece last week gave the Greek much needed cash to fulfill their immediate obligastions. However, it does not mean that they can breathe easily yet. To be able to clear their piled up debts as well as bargain with the Eurozone, Greece have to secure other means of funding even before the four month extension ends. Whether it is true or not that negotiation for third bailout is underway, we can certainly say that the Greek debt drama has not yet reach its final conclusion. Although the possibility of Grexit could probably be taken out of the equation, Greece dependency on debt is still the biggest risk in the region.

 

The Plus and Minuses

As we know, ECB stimulus that spanned sovereign bonds will be started in March. Therefore, from this viewpoint, there is good reason to think that Eurozone recovery will pick up later. However, for the time being improvement remain lacklustre due to the mixed performance between countries. For instance, gain on Ireland and Spain job market versus drop elsewhere only allows overall Euro area unemployment to slip slightly from 11.3% to 11.2% in February. In effect, the Euro is not arrived at its lowest low yet despite of having been depreciated against all major currencies in the past year.

EuroEuro Performance Chart

This week, several scheduled releases will maintain volatility on Euro pairs, particularly EUR/USD. There is German retail sales later today and Eurozone for tomorrow, European Central Bank policy meeting, and GDP report from the Eurozone, beside of other more influential news from the US such as Non Farm Payroll in Friday. The star of the attraction doubtless will be press conference post-ECB meeting and NFP. In regards of Euro pair, though, analysts agreed to keep eyes on ECB meeting first and foremost.

Boris Schlossberg from BK Asset Management wrote, This week the focus in the EZ will turn to ECB meeting on Thursday with markets eager to hear Mr. Draghi’s plans for QE as well as any ECB actions vis a vis Greece. If Mr. Draghi does not suggest any further expansion of the proposed QE program the euro may actually rally on relief as it appears to oversold on a short term basis.

Meanwhile, Christopher Vecchio from DailyFX argued that market will also watch ECB updates on economic projections. He noted, With energy prices low and the Euro weak, we expect both real GDP and inflation forecasts to be boosted in the future, mainly 2016 and 2017. While the 2015 real GDP forecast will probably be nudged higher, the 2015 inflation rate will likely not; the market’s reaction around the projections will be a good indicator of the direction of the Euro for the coming weeks.

In further analysis, Vecchio mentioned that EUR/GBP and EUR/JPY remain bearish as The technical developments seen in several EUR-crosses suggest countertrend moves taking place that may offer 'sell the rally' opportunities over the coming days; it's far too early to call a bottom in the EUR-crosses.

 

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