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Europe Watch

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Europe Watch

F. Scott Fitzgerald once wrote that "the test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function." He may have been considering European equity markets. On the one hand, the French equity market rallied when French President Francois Hollande forced the resignation of his government in order to purge it of ministers opposed to fiscal austerity. Presumably the market thought France might finally get some meaningful supply-side reform? On the other hand, when European Central Bank chief Mario Draghi argued at Jackson Hole that fiscal austerity had gone too far, markets also rallied! So which is it? Is austerity needed or has it gone too far?

We suspect markets are proausterity (just look at the success of Spain!) and so cheered the news in France. But, knowing Draghi doesn't actually have any fiscal powers, they discounted his back-peddling at Jackson Hole and only reacted to the suggestion that he was now so worried about Eurozone demand that he would accelerate the introduction of QE. The result was ever lower bond yields and a weakening of the Euro – also useful ingredients for the recovery.

Source : CBRE Global Investors

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