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Crashing commodity prices are driving down PPI, this is marginally positive –but only marginally…

Eurozone PPI data released today showed the largest single month decline since 1987. This is good, though hardly unexpected, news for the EU business community -with collapsing commodity prices, the cost of materials was bound to swan dive. The room that the drop gives the ECB to cut rates further was enough to help spark a rebound in European Stock indices with the STOXX 600 rising 0.6% from earlier lows of over -2%. European rate cuts are on the tap for Thursday.

We remain negative on the EU markets in aggregate. Lower inflation will not do much to help the EU in itself, consider the full picture:

• Eurozone Unemployment for October increased by 0.1% to reach 7.6% (inclusive of Germany, where unemployment remained flat)
• Economic Confidence for October dropped to 74.9 from 80, with both consumer and industrial confidence reaching -25 for November.
• PMI data from NTC dropped to 43.61 for October, the lowest level in over a decade
• Industrial production in September declined by 2.4% year-over-year, the largest drop since 2002.
Taken in the aggregate, the glass-half-full crowd’s bullish reaction to PPI seems premature. With the Euro currency collapsing, imported inflation remains a very relevant factor to model – this is one of the reasons why nominal European inflation remains elevated. With no catalyst for resumed growth on the horizon for many of the region’s major economies, the impact of further rate cuts can only help to stabilize the trajectory of the decline.

Although we are long Germany’s Stock Market via the ETF EWG, and will opportunistically buy into the markets of other EU nations that have well managed economies, we won’t be a buyer of the Union as a whole unless some truly positive data emerges. We remain very bearish on the UK, and we remain short that market via the EWU etf.

Keith McCullough

Andrew Barber