Why Hasn't the Euro Cracked Yet? European Central Bank Grapples With a Mess
NEW YORK (TheStreet) -- It is early July and any thoughts about Europe generally concern upcoming vacations.
But financial market watchers need to keep an eye on Europe for another reason: its economy is not doing so well. This matters for all companies generating sales and profits globally.
Last month I wrote that it's wise to "keep an eye on Europe as a source of volatility for the world," following the move by the European Central Bank to negative deposit rates.
It does not take a financial genius to conclude a shift to negative deposit rates does not come from a position of strength. ECB President Mario Draghi confirmed this at his monthly press conference today, in which he described the eurozone economic region as a place where "unemployment remains high.... unused capacity remains sizable."
Contrast this sentiment with the good nonfarm payrolls news today.
Here are the two key factors all investors need to think about with regard to Europe.
1. Economic weakness is not good for any company generating sales and profits in the eurozone economic region.
The second quarter earnings season kicks off next week. Investors need to be braced for comments about weak trading and pricing power challenges from the European divisions of American listed companies. This could take the gloss off potentially good U.S. trading news.
2. The introduction of negative deposit rates should pull the value of the euro down.
This may come too late to make any vacation feel cheaper, but the contrast between the direction and speed the European economy as opposed to the U.S. economy is become more marked by the day.
If you can't believe it, take a look at the bond market. The gap in the yield between 10-year Treasuries and 10 year German bunds is at a 15-year high.
Why are mainstream eurozone bonds such as the German bund so low-yielding? It is due to the lack of inflation and general economic momentum.
Why the euro has not yet materially cracked is one of the biggest conundrums in global finance at the moment.