The resignation of German Finance Minister Lafontaine is helping boost eurozone bourses, but the euro is giving back a good part of yesterday's knee-jerk gains. The German bund market is largely sustaining yesterday's rally in the wake of the news, but has not managed to materially build on those gains, while European bonds are playing catch-up.
Lafontiane had alienated much of the New Middle that Chancellor
sought to capture in election that swept the Social Democrats and Greens into power last September. It was not his haranguing the ECB that drove Lafontaine out of German politics. Rather, reports suggest Lafontaine lost his temper in an internecine battle with Schroeder, who it appears also had threatened to resign earlier this week.
The greatest fallout from Lafontaine's departure will be on German politics.
The left wing of the
Social Democratic Party
, which had been its heart -- if not its head as well -- while in opposition under Kohl's long tenure, is now without an obvious leader. This will be evident almost immediately. Schroeder has intimated that the controversial tax reform that had already been approved by the lower house of parliament will be completely reworked. German insurers and utilities, which vociferously objected to the tax reforms, are leading the
sharply higher today.
Hans Eichel, former premier of the state of Hesse, was named Lafontaine's successor.
Eichel is not widely known in financial circles. His appointment will let Schroeder consolidate his power in the party and government. The fate of Lafontaine's No. 2 man Flassbeck is not known. It should not be surprising to see Schroeder's old business ally Stollman resurface after being outmaneuvered by Lafontaine shortly after the electoral victory last fall.
Contrary to the claims in most of Lafontaine's political obituaries, the ECB is not about to cut interest rates. As much of an irritant as Lafontaine was to the ECB, the reason it has chosen not to cut rates has little to do with personalities and more to do with economic analysis. The bankers argue that nominal interest rates are sufficiently stimulative. Money-supply growth and bank lending remain strong. Parts of the eurozone that are particularly prone to inflation, like Spain, Portugal and Ireland, are continuing to expand.
The objective conditions in the eurozone haven't been changed by the resignation of the German finance minister.
While reasonable people can disagree with the ECB, realpolitik suggests a rate cut in the near term would undermine the ECB's credibility by making it look particularly petty. What the dollar's recovery today is telling us is that the interbank foreign exchange dealers, in Europe late yesterday and in the U.S., exaggerated the Lafontaine premium in the international markets.
Look at today's German retail sales report for an illustration of the real forces at work. The Federal Statistics Office reported that retail sales fell 2.6% in February on a year-over-year basis. The market had expected only about a 1% decline. Compare those figures with yesterday's stellar U.S. retail sales report. On a year-over-year basis, U.S. February retail sales rose 7.7%. Growth differentials rather than personalities are the real source of pressure on the euro. Elsewhere, Italy reported a 0.3% contraction in fourth-quarter GDP. This compares with expectations for a 0.1% contraction. Meanwhile, earlier today both Spain and France reported inflation data at the upper end of expectations. Lastly, note that bourses in European countries not participating in monetary union, like the U.K., Switzerland, and Sweden, are lagging behind today's equity rally.
Japan also reported disappointing news.
Its GDP contracted 0.8% in the October-December period, much more than expected. It is the fifth consecutive quarterly decline. Although consumption was soft, real weakness was seen in investment. Residential investment fell 7% in the quarter and nonresidential investment fell 5.7%. Meanwhile, the
Bank of Japan
left policy unchanged at today's board meeting. Given that the BOJ has practically run out of room to drive overnight rates lower, some participants had hoped that it would begin targeting money-market yields.
Today's decision was reportedly not unanimous and the market awaits BOJ governor Hayami's press conference on Monday for more insight. Finance Minister
hinted that the government will continue to push rates lower, and this helped reverse the initial weakness in government bonds. The benchmark yield fell 2.5 basis points to 1.715%. On the week, the yield rose 16 basis points.
Ecuador appears to have successfully negotiated a $530 million loan from international lenders and an
package is expected in the coming weeks. The bank holiday, which has lasted the entire week, will be lifted on Monday. To prevent a run on the already weak banks, limits on withdrawals appear likely to be imposed. Thus far there is little sign that Ecuador will adopt a currency board in the very near term. In their polemical zeal, many proponents of currency boards often ignore the conditions, like a sound banking system and sufficient reserves that enhance the chances of success. Ecuador is small enough that it is relatively inexpensive to fix and the managers of the international economy, from the U.S. Treasury to the IMF, can count on another successful rescue operation.
Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he was long U.S. bonds and some mutual funds that have investments in Europe, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at