- Euro crumbles after German courts challenge ECB stimulus
- Outlook still bleak, this is the last thing the fragile Eurozone needs
- Stocks trim gains on Fed gloom and Congressional ‘pause’, yen climbs
- Today: ADP data will give a taste of what’s on Friday’s NFP menu
Euro falls apart as Germany challenges ECB
The single currency came under heavy fire yesterday, after Germany’s top court ruled that the ECB’s asset purchases were unconstitutional. The judges gave the European Central Bank three months to amend its rules or else Germany’s central bank – the Bundesbank – can’t participate in the QE program anymore.
This threatens the ECB’s independence. And while the ECB will probably be able to justify its actions to satisfy the court this time, this legal precedent poses a much bigger threat to the central bank’s latest pandemic QE program, which has even looser rules than traditional QE. As such, it might be a matter of time until this pandemic program is challenged too, which could limit the ECB’s ability to expand it in the future if the crisis deepens.
Ultimately the ECB is the glue that is holding the fragile European economic project together as there is no fiscal union, and if it is forced to wear a monetary straitjacket as well, then there’s nobody left to do the heavy lifting in times of crisis. The ECB has been the only game in town for many years, so if its ability to backstop markets especially in the periphery is diminished, that poses a real danger for financial stability down the road and reignites fragmentation risks.
Euro/yen fell to a new 3½-year low this morning as markets continue to price a risk premium on the euro. The outlook for the single currency remains bleak, as the lack of a burden-sharing mechanism will likely set the stage for an anemic recovery in economies like Italy, which need massive fiscal stimulus. Moreover, if the euro couldn’t rally in recent days when risk appetite was strong, then it could really crumble if fear returns, especially against the dollar and yen.
Equities pare gains as Fed’s Clarida injects some realism
It was another contradictory session on Tuesday, with the S&P 500 (+0.9%) closing with decent gains even though the defensive Japanese yen and the dollar outperformed most in the FX arena, while gold edged higher. The fact that equities are rallying alongside safe havens is ominous, and possibly a sign that many investors are hedging risk because they don’t have much faith in this heavily concentrated stock market from here.
Stocks gave up a good chunk of their early gains yesterday after Fed Vice Chairman Clarida injected a rare dose of realism into the markets, warning that economic data will get much worse and that the recovery could begin in Q3. With stock market valuations now implying a record-fast recovery, his somber assessment probably came as a reality check.
More importantly, Senate leader Mitch McConnell said that it’s time to push ‘pause’ on any more stimulus for now. It seems that some Republican deficit hawks have woken up from a long slumber ahead of the election.
Jokes aside though, if the Fed has fired almost all its stimulus bullets already and Congress is getting scared of the exploding deficit, what does that imply for stocks if we hit another bump in the recessionary road?
Loonie climbs with oil, ADP jobs data in focus
Elsewhere, the Canadian dollar climbed yesterday alongside oil prices, as the storage crisis appears to be easing. That said, there’s still a difficult road ahead as we approach mid-May, when the June WTI contract expires.
As for today, the ADP jobs report for April will give us a sense of what to expect in Friday’s nonfarm payrolls.