Europe's woes Multiply - BBH

"The Markit group that provides many of the PMI surveys noted with today's reports that the eurozone outlook has "darkened dramatically."  This makes for a poor backdrop for the ECB, which meets next week," BBH analysts argue.

Key quotes

"This seems largely taken for granted. The real issue is when will it deliver its first hike.  Although some observers had forecast a hike for the end of Q1 19, we had thought mid-year was a better bet.  We have been picking up more talk that the first rate hike may come after Draghi's term ends in October 2019."

"Growth and inflation are the least of Europe's problems, which is no joking matter.   The growth peak is behind it.  The business cycle is mature.  The price pressures generated during the expansion did not rise to levels that would have justified an ECB rate hike   When the ECB gets done with its asset purchases, which we expect to be the year-end, the deposit rate will be sitting at minus 40 bp."

"Europe's political problems are multiplying and becoming more pressing.  The most difficult decisions about Brexit are unresolved and some tentative agreement by October or so, to give the various stakeholders time to debate and approve, seems like a stretch.  Greece's third assistance program formally ends later this month, though the last payment is in August.  Greece does not want another credit facility as a backstop.  Greece access to the capital markets may have improved, but it is still tenuous. Meanwhile, the creditors who promised debt relief at the end of Greece's program are balking, which could further impinge on the willingness of investors to buy Greek paper."  

"There is increased talk that US trade practices and the weaponization of access to dollar funding could spark a change in the dollar's status as a reserve currency.  Some scholars suggest that it is possible to have a multiple currency reserve system and sometimes find in history that this occurred.  Even though the euro is cited as a likely candidate, the facts on the ground tell a different story.  The euro's share of global reserves is smaller than the sum of its parts (e.g., DEM, FRF, BEL, ECU).  Yields are lower.  Liquidity is lower.  The European sovereign bond market is more like the US muni market than the US Treasury market with many different issuers, of relative small offerings, and with different rules and idiosyncrasies."