On Wednesday, Mario Draghi picked up on something important. The day before the ECB holds its monthly policy meeting, Draghi said the following:
"...the latest data suggest that [the crisis is] now starting to affect the German economy."
Draghi is referring to the annual report released by Germany's council of economic advisers Wednesday which predicted the German economy would expand at a meager .8% pace in 2013, unchanged from 2012's growth rate. The main culprit: slowing exports to the rest of the eurozone. It is certainly nice that the President of the European Central Bank has finally admitted that the eurozone's strongest economy is buckling under the pressure considering all other serious observers realized this quite some time ago.
For instance, in an article published on August 29, I outlined the situation in detail noting that 1) the German economy expanded by a miniscule .3% during the second quarter, 2) Germany's all-industry PMI had completely converged (in contraction territory) with that of the rest of the currency union, 3) business confidence was eroding at an alarming pace, and 4) Germany's exports PMI tends to be highly correlated with German GDP and that, in this case, isn't a good thing.
A little over two months later and all of these trends have continued. Markit's senior economist Tim Moore had the following to say about Germany's manufacturing and services PMIs in October:
"October's final German PMI data highlight a lack of momentum in either services or manufacturing at the start of Q4 2012, with both sectors posting slightly sharper output falls than one month previously. At its current level, the composite PMI figure raises the likelihood of an outright GDP contraction during the final quarter of the year."
As for German business sentiment, the IFo Institute's business confidence index fell to a 31 month low in October and as for exports, as I alluded to above, Germany's council of economic advisers sees import growth outpacing export growth next year on continued weakness in the EMU.
Critically, Wednesday's morning market activity shows that contrary to popular belief, the U.S. election is of little importance to stocks compared to what is happening in Europe. I noted this earlier in the week regarding the Greek parliamentary vote. If you need further proof, consider the following two headlines which appeared on CNBC Wednesday morning: "Dow Breaks 13,000 on EU Fears", "Obama Rally Fizzles After German Data Disappoints".
Sorry American exceptionalists, the collapse of the eurozone is infinitely more important in terms of the financial markets than who wins the U.S. presidency and for this reason, investors should remain short the broad market (SPY) (QQQ) until there are signs of real structural improvement across the Atlantic.