Eurozone Strains Linger

Eurozone Strains Linger

European stock indices retreated on Monday from last week’s seven-year high.

Disappointing economic updates from China and Japan along with underwhelming German industrial production data pushed the market lower.
The Stoxx Europe 600 declined 0.4% after rising 1.8% on Friday. France’s CAC 40 also fell 0.4%, while the UK’s FTSE 100 dropped 0.7% and Italy’s FTSE MIB lost 0.3%.

A recent report from China showed imports were unexpectedly down 6.7% in November despite economists’ forecast of 3% growth. Additionally, Japan’s economy contracted more than initially projected in the third quarter – 1.9% rather than 1.6%.

“While lower commodity prices may have placed a downward bias on the import number, the extent of the negative surprise, coupled with the overvalued [Chinese yuan], suggests there was in fact a real element of much slower domestic demand,” Sue Trinh, senior currency strategist with RBC Capital Markets, noted to MarketWatch.

New credit ratings push Italy down, Ireland up
Standard & Poor’s latest credit ratings included a downgrade for Italy and an upgrade for Ireland, according to The Wall Street Journal. The divergence indicated that eurozone pressures are still very much alive.

Ireland was granted single-A status – a vote of confidence that the nation is stronger than those of its peers affected by the economic crisis. S&P speculated Ireland’s gross domestic product would grow 3.5% through 2017, while gross national debt should decline from 136% of GDP in 2013 to 106% in 2017. Ireland’s labor and product markets have flexibility that its eurozone peers lack, giving the nation the ability to react to market conditions more rapidly.

On the other hand, S&P reduced Italy’s rating to triple-B-minus – almost an exact contrast with Ireland. Italy’s GDP is forecast to grow by only 0.5% through 2017 and gross national debt is expected to rise to 133.5% by 2016. Italy’s labor costs are rising, not falling, and restricting the nation’s ability to adapt.

The widening gap is cause for concern for European Central Bank President Mario Draghi. Successful monetary policy in the eurozone would influence growth for all members – not strength in some and weakness in others.

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