Is Euro Headed To Pre-ECB Lows?
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Global equity markets stabilized today on the second trading day of the year but remained at depressed levels after Monday’s vicious selloff as the dollar remained well bid against all of it major trading partners with the exception of the yen.
There were reports overnight that Chinese authorities intervened in the equity markets which helped stabilize the Shanghai index after it opened down nearly 3%. Still the action in equities suggests that investors remain nervous about the state of the Chinese economy and many analysts have pointed out that the country may be facing structural problems that will not be solved by simple fiscal or monetary accommodation.
Over the past 5 years China has accumulated a massive amount of private sector debt. Indeed from 2009-2015 China’s private sector debt as percent of GDP has risen by 75% – one of the highest levels in the world and it now hangs as a threat to the whole economy much as housing debt did to the US economy in 2008.
The turbulence in Chinese equities is having an impact on Western markets which remained under pressure for the second day in a row with both Dax and S&P futures lower on the day by about 0.5%. Still the volatility in capital markets was considerably less tumultuous and currencies stayed in narrower ranges but the greenback continued to strengthen resuming its role as a safe harbor trade as US bonds rallied a bit.
On the economic front the calendar was relatively quiet with only a smattering of second tier data on the docket. In Germany the labor conditions continued to improve with unemployment declining by -14K versus -7K eyed as the unemployment rate remained at 6.3%. Meanwhile EZ inflation increased by 0.2% versus 0.3% forecast. This was the second consecutive positive reading suggesting that deflationary forces are receding from the region, but price
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