Market Overview

Eurozone Growth Slows in March

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Eurozone growth continued to slow in March raising fears of a prolonged, deepening recession and raising calls for the European Central Bank to act quickly to prop up the fledgling European economy.

Markit Economics reported that both the service sectors and manufacturing sectors in France, Germany, and the broader eurozone slowed in March.

For France, the manufacturing PMI was flat at 43.9 although economists were expecting a rise to 44.3. The services sector was weak too, dropping to 41.9 in March from 43.7 in February on expectations of a reading of 44.0, marking a 49-month low. The composite PMI, representing both sectors, fell to 42.1 from 43.1 in February, marking a four year low for the index.

Moving to Germany, the manufacturing PMI unexpectedly slipped to a contraction in March, falling to 48.9 from 50.3 in February on expectations of a reading of 50.5. Further, the services PMI was expected to rise to 55.0 from 54.7 in February but was reported as slipping to 51.6. Lastly, the composite index fell to 51.0 from 53.3 in February, a 3-month low for the index.

The weakness in both France and Germany flowed through to the broader Eurozone PMIs. The Eurozone Manufacturing PMI unexpectedly slipped to 46.6 from 47.9 in February on expectations of an increase to 48.2. Also, the services PMI slipped to 46.5 from 47.9 in February, below expectations of a rise to 48.2. The composite PMI slipped to 46.5.

In all, the data shows the weakness of Europe's economy at its current impasse. While news circles around Cyprus and its ailing banking system, the real economy continues to slow. The continued weakness in output indicators should put pressure on ECB President Mario Draghi to stimulate the economy.

The hopes of further easing sent the euro lower in early trading. The EUR/USD slipped as low as 1.2892 following the news but rebounded back to 1.2908 as of writing. Further, the euro declined sharply against the yen, declining more than 1 percent to 122.88. Yen strength was seen broadly in the market, a clear sign of a risk-off environment on the news.

French stocks declined sharply throughout the European trading session as the data pointed to significant weakness in France. The French CAC 40 Index declined 1.57 percent with weakness seen in materials stocks, consumer stocks, and industrials. The German DAX also declined sharply, losing 1.23 percent with weakness seen in materials stocks, consumer cyclicals, and financials.

As mentioned, the news puts pressure on the ECB to cut rates to ease policy and stimulate the economy. Currently, the ECB's target rate is set at 0.5 percent and it could be cut to 0.25 percent. Also, the ECB has its arsenal of non-traditional tools such as the LTRO's and the OMT that it has yet to utilize.

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