Central Banks

Monday, August 24, 2015 - 08:12

Analysis: Stock Rout Seen As Little Threat To EMU Recovery

By Jack Duffy

PARIS (MNI) - The global stock market rout, which has slammed European equity markets harder than those in the US, is still unlikely to derail the fledgling Eurozone recovery, government officials and analysts said.

Equity market declines in Europe Monday, following the latest plunge in Chinese stocks, knocked the FTSEEuroFirst 300 index of top European shares down 3.9%, bringing its loss for August to more than 12%, its worst month since October 2008.

The August plunge, which has erased more than E1 trillion in market value, compares with losses of less than 7% for both the Dow Jones Industrial Average and the S&P 500 as of Friday's US close. The S&P 500 is seen opening around 3% lower today.

Officials say Europe's recovery, based on rock-bottom interest rates, cheap and still declining oil prices and a weak euro, remains well grounded despite the swings in global equity prices.

"We expect this volatility coming from China to pass," one French government official told MNI. "The fundamentals behind the European recovery remain sound."

The euro has rallied sharply from its lows, however, as equity declines have diminished expectations of an imminent US rate increase. The euro jumped to nearly $1.15 in Asian trading Monday, the highest level since February.

Economists say the net effect of a stronger euro balanced against crude oil prices that have slumped to new 6-and-a-half year lows of around $39 a barrel is likely to be neutral or even slightly positive for the European economy.

"This kind of stuff may have an impact on GDP of 0.1% to 0.2%," said Holger Schmieding, chief economist at Berenberg Bank. "It's not the difference between growth and no growth," he said.

The European Central Bank is currently expecting the Eurozone economy to grow by 1.5% this year, strengthening to 1.9% in 2016 and 2.0% in 2016.

Raoul Ruparel, head of economic research at London-based think-tank Open Europe, said that the euro rate would only become a concern to the ECB if it continued to appreciate while growth and inflation remained sluggish.

"It the euro stays stubbornly high with growth staying low and inflation staying low, that could as a package encourage them to look at the QE program again," Ruparel said. "But that is a long-term issue. At the moment, I would think they would be fairly unconcerned" about the euro exchange rate.

In its June staff projections, that ECB said it was assuming a $1.12 euro rate for its forecast horizon.

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@mni-news.com
--MNI London Bureau; tel: +44 207-862-7495; email: martin.baccardax@mni-news.com

[TOPICS: M$X$$$,MI$$$$,M$$EC$]

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