Global equity markets remain choppy and the safe-haven Swiss Franc has appreciated further, with the trade-weighted index (TWI) up 0.8% in the past week. Conversely, the Euro continues to weaken, dragged lower by Eurozone data pointing to slowing economic growth. The EUR/USD cross was trading below 1.14 for the first time since mid-August and European equities are down nearly 2% on the day. The Eurozone composite Purchasing Managers Index (PMI), which has historically correlated closely with economic growth, fell to a 2-year low of 52.7 in October, based on preliminary data, from 54.1 in September. To put this in context the index was threatening to break through the 60-level early in the year.
This suggests that Eurozone GDP growth may have slowed in October to below 2% yoy from an already modest 2.1-2.2% yoy in Q2-Q3. From the market’s perspective this does not sit well with the European Central Bank’s decision (back in June) to taper its QE program – specifically to halve its monthly asset purchases to EUR 15bn in Q4. The ECB’s decision to effectively tighten monetary policy despite modest Eurozone growth and inflation, along with the ongoing Italian budget saga, have pulled the rug from underneath the Euro. This will put an even brighter spotlight on tomorrow’s ECB policy meeting although ECB Board members may be reluctant to give into market pressures at this stage and make any significant changes to their monetary policy settings.
