European Lending Stalls

Besides the battle of words between Greece and Germany, other data throughout the Euro Area is pointing to challenging times for the monetary union even after a resolution of Greece.  Italy yesterday announced the latest figures for nonperforming loans, showing a surge to €185.5 billion, the highest on record, reaching nearly 10% of annualized GDP.  This coupled with 33-straight months of contraction in bank lending is not a positive sign for the Euro Area’s third largest economy just as the ECB’s Mario Draghi tries to orchestrate a turnaround in the lending.  After a modest bounce, the Euro is once again trending lower against peers as expectations of Greek exit rise.  Although not yet impacting lending, quantitative easing is seeing regional equity benchmarks soar, with the German DAX hitting new record highs yesterday.

US benchmark equity indices rallied yesterday even after disappointing industrial and manufacturing data highlights the risks to the economic outlook.  The worsening in fundamental data made no dent in equity valuations as indices inched back towards record highs, with all benchmarks rising over 1% on the session.  Manufacturing production which was forecast to expand in February actually contracted -0.20% while industrial production figures expanded a meager 0.10% with the prior number revised lower to -0.30%.  What is more surprising is that the decline in oil prices failed to impact energy stocks which have notoriously been highly correlated with movements in commodities.  With WTI crude oil falling below $43 per barrel briefly, it is possible that stocks in the energy sector will be under renewed pressure in coming sessions as the divergence ends.