The financial market is moving slightly against the main news flow, showing signs of recovery in demand for risky assets while data is getting worse.
According to the latest Ifo report, business sentiment in Germany is falling harder than expected, but that is not stopping euro buying in European trading on Monday. The same can be said for purchases of European equities, which are also rising on Monday.
The Ifo reports a drop in the business conditions index to 88.6 in July from 92.2 a month earlier. The index was below the current values for four months in 2020, and before that, from October 2008 to July 2009. These have been the most challenging times for the German economy with high uncertainty and credit market conditions.
Extremely low expectations are pulling the indicator down. The respective Ifo index is close to the extremes, seems in a financial crisis and is only a couple of steps away from the lows of the pandemic.
The markets are probably starting to speculate that too much negativity is already priced in. So, the authorities and the central bank might begin to slow down the pace of tightening the screws.
The US debt market is pricing in more and more chances of a recession, and politicians are shifting the emphasis away from the word recession, pointing out that two consecutive quarters of GDP decline should not automatically be called a recession.
This is reminiscent of the ‘temporary’ inflation story a year earlier when politicians softened the agenda by giving events other definitions. This temporarily relieved markets but contributed to an accumulation of alarming trends. As a result, central banks now must do more to fight inflation than it took them to start earlier.
Good or bad in the long run, EURUSD is now enjoying solid buying on the decline to the 1.0200 area, although not failing on attempts to climb above 1.0270 since last week. We will only get a meaningful bullish victory signal when EURUSD rises above 1.0350. Until then, we can only talk about a technical correction after oversold conditions.
The German DAX40 is buying back from the 13000 level, but it gets too heavy when it rises above 13400, where the 50-day moving average is now running.
