Everyone is starting to give their prognostications for the financial markets in 2015 and we are no exception, with our forecasts planned for next week. This week, however, we will take one last look at the area outside the U.S. that made the biggest splash this year – Europe.
We were reminded earlier this week that the continent always seems to have a surprise up its sleeve. The move to bring forward elections in Greece came as something of a shock to investors. The fear is that the outcome of these elections could be “bad” for markets, if reforms implemented as part of the rescue plan are abandoned. Of course, these fears are from the same investors who were willing to lend to Greece earlier this year at 5.50% for 10 years.
But I think the real watchword for Europe in 2015 will be politics. Not so much the electoral politics that we will be discussing in the spring such as the May general election in the U.K., but the politics of the European Central Bank (ECB). ECB President Mario Draghi’s skills will be tested like never before, as he wrestles with a faltering economy and Germany’s reluctance to support quantitative easing (QE). Indeed there are still legal challenges about whether or not Germany can participate in QE, which adds to the country’s lack of appetite for it.
There are a lot of moving parts to this drama, but probably the single biggest factor is whether or not Europe has decent economic growth in the first half of the year. If there is growth, the Germans will no doubt put an end to any and all QE talk. Further erosion in Europe’s economic prospects will likely pressure the Germans into accepting QE.
My View: We are more likely to get a slow growth Europe in the first half of the year, which will force Germany’ into agreeing to Draghi’s QE ideas. That would continue to push the euro down over the course of the year, but not by much, as a great deal of pessimism is already priced into the currency.
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