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European Markets Brush Aside Dismal French Data

Friday, 10 November 2006 12:04:25 GMT  |  Terri Belkas, Currency Analyst

French GDP (QoQ) (3Q A) (12:40GMT; 7:40EST)

Actual:                   0.0%

Expected:             0.5%

Previous:              1.2%

How Did the Markets React? 

 

The markets have had quite a bit of news over the past week by which to pay attention, be it the US mid-term elections where the Democrats swept the House and Senate, or comments by PBoC Governor Zhou which revived the topic of reserve diversification away from the greenback. Today, however, fixed income, FX, and equity markets all responded in the “correct” manner to news that French economic growth stagnated in Q3 after surging 1.2% in Q2. While a breakdown of the data is not available, the flatline result was likely due to a weakening of the industrial sector along with an easing of exports, as demand for French products wane. The tepid result underpins EU official’s concerns that the ECB is being too aggressive with monetary policy. However, with the central bank remaining resolutely hawkish, a December rate hike to 3.50% is still very much in the cards. European markets took the ECB’s hawkish demeanor into account, along with the greater global issues at hand, as yields, the euro, and equities subsequently resumed their paths higher within an hour of the French release.

Bonds – German 10-Year Bunds

European fixed income markets responded quickly to indications that economic growth could be far slower than the ECB had anticipated, as French GDP idled in Q3 after jumped 1.2% in Q2, and runs directly counter to French Finance Minister Thierry Breton’s expectations of 2-2.5% growth in 2007. Furthermore, the data signaled that the economies of the Euro-zone may not be able to withstand higher rates, sending prices on 10-year German bunds to surge to a high of 102.32. However, bunds eased within the hour as ECB member Juergen Stark commented, “We said… that quarter-on-quarter growth volatility towards the end of the year was to be expected.” Additionally, the central bank has remained resolutely hawkish by citing the need for “strong vigilance,” leaving the probabilities of a December hike to 3.50% very high.

FX – EUR/USD

 

While the euro responded swiftly upon the release of stagnating French economic expansion, the 10 point drop in EUR/USD was tepid and short-lived as the pair worked its way nearly 40 points higher over the course of the next hour. The greater price movements of the euro have been centered on overall dollar weakness, as the greenback has been battered by news such as the Democratic sweep of the House and Senate, along with comments from PBoC Governor Zhou, who reignited talk about reserve diversification away from the dollar. On the European side, ECB member Stark noted that volatility in growth had been expected by the central bank at the end of 2006, which underpins the potential for a 25 basis point hike to 3.50% in December. Traders kept this in mind, leaving euro to hold onto this past week’s gains.

Equities – Xetra DAX 100 Index                                                     

 

European equities started out the day with a freefall, as Frankfurt’s benchmark index, the Xetra DAX 100, gapped down and accumulated nearly 50 points of declines to hit a low of 6311.53. The market opening happens to be just after the release of French GDP data, which fell flat in Q3 against expectations of a 0.5% rise following the 1.2% jump in Q2. The disappointing results left traders questioning the health and sustainability of growth in the Euro-zone in the face of rising interest rates, as the ECB has been unwavering in their calls for “strong vigilance” against inflation. Much like the FX market, the DAX eventually worked its way higher on comments from ECB member Stark, who said that quarter-on-quarter growth volatility had been expected at this time of year, leaving traders more confident that an imminent slowdown was not approaching quite yet. Nevertheless, the DAX was still down 0.1% at 6,357.12 by the European mid-day, as pharmaceuticals dropped in line with the US sector. US companies such as Pfizer and Johnson & Johnson took a hit amidst concerns that Democratic policy makers may try to push through legislation that makes it easier for generic competition, or increase pricing controls on the large companies.

 

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