he Markets Call “BS” on Draghi’s Promise
In 2012, ECB President Mario Draghi, pulled the EU back from the brink of collapse by promising to do “whatever it takes” in the summer of 2012.
Since making that promise, the two biggest problem countries for the EU, Spain and Italy, have both seen the yields on their bonds fall.
Draghi’s promise also lit a fire under EU stocks, with Spanish, Italian, and German markets roaring higher.
It is critical to note that Draghi accomplished this without actually doing anything. All he did was make a verbal commitment.
The only problem with this is that while sovereign bond yields have fallen and EU stocks have rallied, the EU economy has not recovered. GDP growth for the EU as a whole was a measly 0.2% in 2014… the same as fourth quarter 2013.
Indeed as the below chart indicates, the supposed “recovery” Draghi had hoped his promise would create has failed to manifest.
Draghi tried to gun the system by cutting interest rates to negative in June then launching an asset purchase program this month… but neither policy looks to be changing anything.
Italy is back in recession for the third time since 2008. Germany’s economy contracted in the second quarter of 2014 and will likely be in recession before the first quarter of 2015. France has registered zero growth for six months now.
And the markets smell “trouble.”
European financials have taken out the trendline that supported them since the 2012 bottom:
Europe’s crisis is not over, not by a long shot. Mario Draghi has thrown everything, including the kitchen sink, at the economy over there and has failed to create sustainable growth. It’s now just a matter of time before the next round of the Financial Crisis hits and the whole mess comes crashing down.
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Best Regards
Graham Summers
Phoenix Capital Research