A recession returns to the euro zone

Fundamental analysis for 06.08.2014

The negativity from the euro zone continues to flow in a steady stream. Very few people expected a fall in German industrial orders by 3.2% (as a revised figure - the deepest drop since January 2012). Moreover, compared with the previous month, when the reduction was by 1.6%, the rate of decline has increased. Last time such a consistent acceleration of the negative dynamics was observed in late 2012. 

It turns out that in general, the weak pulse of the euro zone economic recovery has finally died down - without strong German statistics, pan-European data has every chance to return to a new recession. One of the first signs can be regarded as preliminary data on the Italian GDP, which for the second quarter comes with a minus sign, which means that Rome is quite back to a formal recession. 

Moreover, this fact was a complete surprise for the whole euro area, because the expectation was a modest growth in the economy by 0.1%, which would retain the illusive hopes for further recovery. However, a reformist government led by Matteo Renzi failed to conduct effective reforms. In addition, in a recession it will be extremely difficult to deal with the budget deficit, if at all possible. 

By the way, now it is unclear what Rome will do with its economic growth forecast of 0.8% in the current year. Apparently, in the coming weeks we will see a reduction in this evaluation. In general, in the euro area, there was a drop of retail PMI below 50, and hence we will not see support from domestic demand, and without the presence thereof, it is difficult to talk about a return to growth. 

A "Sanctions War" is also unlikely to contribute to the growth of business activity. Yesterday the Kremlin announced the development of retaliatory sanctions, from which European airlines may suffer, in case of suspension of Trans-Siberian airways. If Moscow will take such a step, the loss will be not so much for the aviators but to the economy as a whole, due to investors that are most likely to freeze projects, and wait for the outcome of all this sanction history. 



The strategy of retaining the sale transactions justifies itself. I moved all the stop-loss positions to the last maximums, which already provide profitability of all trades. The most interesting thing is awaiting us on Thursday, namely, as Mario Draghi will continue to justify the uselessness of starting the European QE on the background of the fall in inflation to 0.4% and the return of a recession in Italy. We should stock up on popcorn. 

RoboForex research department Stanislav Koval