The European crises has impacted world markets in a very negative way. However, recent indicators suggest its impact is lessening. This is very important for the US, as the European situation is one of the primary drivers of the latest concern from the Fed:
One factor underlying the Committee's somewhat weaker outlook is that financial conditions--though much improved since the depth of the financial crisis--have become less supportive of economic growth in recent months. Notably, concerns about the ability of Greece and a number of other euro-area countries to manage their sizable budget deficits and high levels of public debt spurred a broad-based withdrawal from risk-taking in global financial markets in the spring, resulting in lower stock prices and wider risk spreads in the United States. In response to these fiscal pressures, European leaders put in place a number of strong measures, including an assistance package for Greece and €500 billion of funding to backstop the near-term financing needs of euro-area countries. To help ease strains in U.S. dollar funding markets, the Federal Reserve reestablished temporary dollar liquidity swap lines with the ECB and several other major central banks. To date, drawings under the swap lines have been limited, but we believe that the existence of these lines has increased confidence in dollar funding markets, helping to maintain credit availability in our own financial system.
First, let's take a look at some of the latest Eurozone economic numbers. From the UK:
The pound advanced this week as a surge in UK growth eased fears that the economy was headed for a double-dip recession.
Figures released on Friday showed the UK economy grew at its fastest pace in four years in the second quarter. The data supported sterling, prompting speculation in some quarters that the Bank of England could move to exit its ultra-loose monetary policy stance sooner than expected.
Lending to businesses and households fell in May, according to official figures, but the downbeat message was offset by a closely watched survey showing the strongest growth in manufacturing output since 1995.
The CBI’s quarterly survey of industrial trends found that a balance of 24 per cent more employers had reported a rise in output for the three months to early July than had reported a decline, with a strong rise in both domestic and overseas orders.
From Germany and the Eurozone (see previous link):
On Thursday, eurozone manufacturing and services purchasing managers’ indices both posted surprise rises in June, helped by a surge in activity in Germany. Meanwhile, the Ifo index of German business confidence posted on Friday a record jump in July, taking it to its highest level in three years.
Frederik Ducrozet at Crédit Agricole said the Ifo reading underpinned the “German economic miracle”. He said the consensus view had been that German growth was set to decelerate markedly in the second half of this year. “This report is likely to lead economists, analysts and investors to revise their growth expectations upwards for Germany.”
At the same time, we're seeing a turnaround is the markets.
While still high, one month libor is starting to move lower.
While still high, three month libor is starting to move lower.
The German markets have turned around, printing a series of higher lows and higher highs. Also note that prices are above the 200 day EMA along with the other EMAs and the shorter EMAs are all moving higher (a). Momentum is positive (b), and money is flowing into the market (c and d).
The British markets have turned around, printing a series of higher lows and higher highs. Also note that prices are above the 200 day EMA along with the other EMAs and the shorter EMAs are all moving higher (a). Momentum is positive (b), and money is flowing into the market (c and d).
The French markets have also turned around, but prices are still below the 200 day EMA (a). Momentum is positive (b), and money is flowing into the market (c and d).