Eurozone news remains not great. Just in recent weeks, there’ve been new debt downgrades, ongoing political unrest in Italy, a looming Cypriot bailout and reports of continuing economic malaise. Yet, compared to 2010 and 2011—and even in early 2012 when negative eurozone news would’ve sent markets into a funk—on average, we’re seeing markets continue to push higher in spite of it.
What’s different? While the eurozone still is fundamentally weak economically, the sharp fears of a sudden and disorderly euro breakup have fallen dramatically. Politicians and officials there remain committed to prevent that worst-case scenario. What’s more, overall global growth has continued despite eurozone weakness—a fact that was highlighted again on Wednesday. Simply, the eurozone woes’ global reach the last few years has been mostly sentiment- or fear-based—not fundamental.
January eurozone industrial production disappointed, falling three percentage points more than already depressed expectations (-0.4% m/m vs. -0.1% m/m.) The two largest economies in Europe—Germany and France—contracted, falling 0.4% m/m and 1.2% m/m respectively. Meanwhile, US wholesale inventories and retail sales rose nicely—implying a healthy US consumer is spending quickly enough to necessitate restocking shelves that were quite previously bare, according to US Q4 GDP. Most expectations are for continued eurozone contraction in the first half of 2013, albeit at a modest rate and led by the periphery. Yet this still seems very unlikely to spill much beyond the old continent.
Fresh off a debt rating downgrade (by Fitch to BBB+ last week) and signs a political stalemate might continue for some time, Italy auctioned 3- and 15-year bonds Wednesday, with higher yields and lower demand. Yields on 3-year bonds rose to 2.48%—their highest level since December 2012. Demand (as measured by the bid/cover ratio) fell from 1.37 at a previous sale to 1.28. However, benchmark Italian 10-year bond yields climbed only 8 basis points on the day to 4.68% and remain well below recent peaks that are roughly 300 basis points higher.
Also on Wednesday, Ireland issued its first 10-year bond since the nation’s 2010 bailout, raising €5 billion. Yields on the debt were around 4.15%, with ample demand—a far cry from the 15% yields in 2010. However, many analysts noted Ireland still has work ahead as it attempts to leave the EU-IMF program and fully repay bailout loans due 2015. Growth remains sluggish in the country, the budget deficit still needs to be reined in and unemployment remains painfully high at 14.6%.
Looking forward, a sharp decline in negative eurozone news isn’t likely. The eurozone economy likely continues to be weak and have its fair share of challenges. In fact, that will likely be true in some pockets of the periphery (we’re looking at you, Greece) for a long time to come. (And perhaps that’s a headwind for eurozone-specific relative returns in the period ahead.) But that’s OK. In our view, overall global growth likely continues too, in spite of this. With global growth continuing and fears of a eurozone catastrophe diminished, the bull run seems primed to continue.