Three years ago today, when Europe was in the throes of a sovereign debt crisis, ECB head Mario Draghi pledged that he and his colleagues would do “whatever it takes to save the euro”. They have been accommodative since then. With a task complicated by the necessity for monetary policy that is not one size fits all across borders. But regardless, taking a page out of the U.S. QE playbook, investors just closed their eyes and bought stock’s on Draghi’s promise. The MSCI EuroStoxx 50 is up 65% since, basically in line with the performance of the S&P500 over the same period.:
But in hindsight, saving the Euro currency, really meant debasing it, and until the U.S. was done with our own QE, this was a near impossible task. The Euro’s 25% slide from its 2011 highs have either set the stage for a broad recovery on the heels of easy monetary policy, or at least put things on autopilot while they put our fires in the periphery. Dollar strength seems like it’s here to stay either as the result of almost every other central bank in the world engaged in some sort of QE, or merely a flight to quality in what could become more difficult economic times.
More difficult economic times? Let’s just see whether its the tail wagging the dog in China or not. There’s debate as to the stock market and the wealth effect in the nation, both up and down. There are varying statistics on the public’s exposure. Or more importantly what part of the public is exposed to the more than 140% margin fueled run up in the Shanghai Composite from its 52 week lows to its recent 52 week highs, and its subsequent 30% drop. Regular readers know my view here. It’s not different this time and the unholy fluctuations in their stock market will have an adverse effect on their already struggling economy in the form of reduced purchasing power by a spooked investors class, or possibly worse. I have been steadfast over the last couple months that just as their stocks overshot on the upside, they will likely do so on the downside, and when they go back through 3400 on the downside (this week?) watch out below:
So while Mario Draghi had a fairly calculated “whatever it takes policy” to save the common currency and the union, it appears to have worked in slow-mo, at least for now. On the flipside it seems that Chinese GDP has been locked at “7% growth” and the powers that be finally got the wealth effect they wanted through the stock market, but have since lost control. Last night’s 8.5% decline in the Shanghai Composite is evidence. And if you thought they were already doing whatever it takes to slow the bursting bubble, just wait until you see the ridiculousness in the coming days/weeks.