Darwin and Financial Markets

Darwin’s evolution theory states that the strongest species survive. This has also become knows as “survival of the fittest”. However, this appears not to be the case in financial markets. Here the cheapest and not the smartest staff members of financial institutions appear to have survived the financial crisis. The most recent example is delivered by comments from traders following the release of the PMI data for the eurozone and member countries on July 1^st, 2013.

The final PMI came in slightly above the flash estimate and the consensus forecast for the eurozone at 48.8, which was one tenth of a percentage point above the consensus. European stock markets, turned negative after being in the plus before the data release. Within 20 minutes, the DAX index lost 0.9% compared to the preceding close. Reuters reported “European shares turned negative on Monday after euro zone manufacturing activity showed signs of stabilisation last month, which traders said sparked concerns of tightening of European Central Bank monetary policy.”

This is ridiculous! Only last week, ECB president Draghi indicated that the ECB has still room to maneuver, which implies that the ECB could cut rates further. Leading European economists polled by a German business daily recommend lowering the key refinancing rate further to 0.25% at the ECB council meeting later this week.

Furthermore, the eurozone PMI is still below the 50 threshold, which is widely regarded as the threshold between contraction and expansion. Thus, the improvement of the PMI is just an indication that the eurozone might come out of the recession later this year. The capacity utilization in the eurozone is far from pointing to any inflationary pressure. The situation in the labor market is dismal in many countries of the eurozone, especially in the South. Therefore, any improvement of the economic situation is currently highly welcomed by the ECB and not a reason of concern.

Also price stability, the ECB’s main target, is not endangered. The flash estimate of the June harmonized CPI inflation in the eurozone edged up from 1.4% to 1.6%. However, this reading is still comfortably below the upper level of the ECB inflation target. Furthermore, the pick-up of the inflation rate is attributable to seasonal food prices, which is not a reason to tighten monetary policy.

Thus, fearing the ECB might tighten monetary policy any time soon is rather insane. It appears that some traders reacted more like skinner rats instead of using their brains.