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European Markets, much vertigo for a free fall?

CAC40, DAX30, STOXX sound very sweet to the ears of optimistic investors. After an excellent year 2013 and a mixed year 2014, 2015 took off with a supersonic bang. Star among the stars, the DAX30 skyrocketed nearly 18 percent in 2 months instead of a mere 2.3 percent  in 2014 after a jump of 23 percent in 2013. The massive quantitative easing (QE) started by the ECB 2 days ago has been the main engine behind the brake-less European financial markets.

It’s so wonderful that it blinded the price each European taxpayer will have to pay for it without any guarantee that the QE will bring the desired outcome. In addition here is the comeback of economic growth, long-awaited since 2008 and the sovereign debt crisis in 2011. A mere 2 percent is enough to delight both politicians and the financial markets. Yet it is barely enough to sustain the ailing and sluggish European economy at its current level. This suggests that the market has yielded again to one of its bad habits: celebrating the positives and ignoring the negatives.

Indeed what can be negative when the majority agreed, contrary to what it said when a quasi-correction occurred in October 2014, that Europe is “the market to be” in 2015. The euro crisis is not over. The showdown between the Eurogroup and Greece, even though the latter will likely be defeated, is the visible tip of a very deep political crisis at the core of which, ignored by politicians, has been melting a huge magma of popular anger whose explosion could happen anytime. In that case, the euro would likely be swept out and the European economy would plunge into the unknown.

Add the crisis in Ukraine, the acrimonious relations between the European Union and Russia, the Islamic terrorist threat, and the cocktail served to investors will ultimately taste very bitter. Icing on the glass, latest economic data has revealed a more serious than expected slowdown of China’s economy. The markets took it as a temporary episode although the fundamentals should encourage them to more caution.

A respiration on European markets would be sane whereas an ongoing bullish trend at the pace recorded since the beginning of the year would be a catalyst for a correction as hard as sudden.

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Saudi Arabia and Gulf region allies – Qatar, Bahrain, Kuwait and the UAE – launched military operations including air strikes in Yemen against Iran-backed Houthis. “The operation is to defend the legitimate government (of President Abd Rabbuh Mansur Hadi),” Adel al-Jubeir, the Saudi envoy to the US, told reporters. Oil prices increased quickly.

China unveiled ambitious plans to upgrade manufacturing power. The implementation of the “Made-in-China 2025” strategy will be accelerated, Premier Li Keqiang announced. This will be key to helping China maintain economic growth at a medium-to-high level and to move up the global value chain, a communiqué said.

“I think reconciliation between what markets think and what the committee thinks will have to happen at some point, (…) that’s a potentially violent (encounter) … and I am concerned about that,” Fed policymaker James Bullard told reporters at London’s City Week financial conference.

Inflation hit zero for the first time, pushing Britain closer to deflation (…) the falling cost of bread, a beer or petrol does impact the housing market (…) if deflation goes on for a fraction too long it can flip a switch in (UK’s) housing market,” Anna White, The Telegraph’s property correspondent wrote.

“We will not accept a bad deal. Our diplomatic engagement with Iran has already delivered concrete results. (…) We know Iran is living up to its commitments so far because (…) we have gained unprecedented access to Iran’s nuclear program,” White House Chief of Staff Denis McDonough said after reports accused Israel of spying on US diplomatic activities as regards Iran.

“Labour will make us as bad as France,” conservative UK Prime Minister David Cameron said. As the national election campaign is approaching its full swing, Cameron said the Labour leader Ed Miliband wanted “to follow the same path as the French government,” namely “catastrophic job losses, a drop in the quality of life, debt to make us weep, and a massive fall in all hope for the future.”

A rate hikelikely will be warranted before the end of the year,” US Fed Vice Chairman Stanley Fischer said. Moreover, “a smooth path upward in the federal funds rate will almost certainly not be realized,” Fischer added.

No oil production cut in ahead. “We repeat that, as for prices, the market determines it, (…) we did not succeed (in finding consensus) because countries (outside OPEC) were insisting that OPEC carry the burden (of cuts) and we refuse that OPEC bears the responsibility,” Saudi Oil Minister Ali al-Naimi said.

Amazon is one step closer to launching its drone delivery service, CBS Baltimore said after the Federal Aviation Administration (FAA) approved the company to fly drones on a trial basis. Amazon has been lobbying the US Congress since it envisaged drone delivery service in 2013.

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