Illustration: Luo Xuan/GT

The most important economic release for many global investors last week was the European Central Bank's (ECB) interest rate decision. And the downbeat narrative provided by ECB policymakers, along with the terrible data out of the eurozone in recent weeks inspired investor expectations that the ECB would begin yet another round of monetary easing. 

While the ECB refrained from changing policy in July and even went as far as to indicate it saw a low risk of a recession for the eurozone, the economic data over the past months tell a far different story. Draghi himself even warned that the economic outlook was getting "worse and worse." 

Considering the importance Europe holds to the global economy, where three of its nations (Germany, France and Italy) are in the world's 10 largest economies, more attention to the state of European economic affairs is required.   

Investor attention is focused on challenges away from macro data - the unpredictability of the Donald Trump administration, how unprepared the UK is for Brexit with less than 100 days to go, global trade relations, geopolitics and the risk of another period of isolation for Iran. With all this coming together at a time where senior political influencers are making regular comments on central bank policies, not enough attention is paid to the dismal run of economic data that Europe is displaying. 

Eurozone manufacturing activity hit its lowest level in more than six years at 46.4 in July. Its largest economy, Germany, is displaying the type of economic momentum that one can attribute to a fallen giant. It is feared that the German economy contracted in the second quarter, while its Manufacturing purchasing managers' index (PMI) recently slumped to its lowest reading in seven years at 43.1. Germany's closely watched IFO gauge of business confidence recently registered its lowest level since 2009 at 92.2.

To be fair to Germany, along with its EU peers, its economic headaches can be largely attributed to external factors on Europe's productivity. Ongoing trade aggression led by the US has led to the slowest growth in global trade since 2012 on an annualized level at 0.5 percent during the first quarter in 2019. 

The lingering threat of the US administration imposing tariffs on European goods remains. Beyond automobiles, the aviation sector is also being dragged into rising US-EU tensions. The US Trade Representative's office published a list of some $25 billion worth of EU exports that could face tariffs as compensation for the ongoing Boeing-Airbus dispute.

Brexit uncertainties have also added to the downcast sentiment over the EU, whereby a messy divorce is set to put to risk the $800 billion worth of UK-EU trade that transpired last year. In the event of a no-deal Brexit, a new trade arrangement between the UK and the EU could take years to formulate, which would severely dampen EU exports to the UK, valued at $431 billion in 2018, in the interim.

Look no further than the euro's performance so far this year to assess market pessimism: the euro has lost nearly 3 percent against the US dollar. During that same period, the bloc's currency has weakened against all of its G10 peers, bar the Swedish Krona. The same trend plays out when comparing the euro against Asian currencies, with the South Korean won the sole exception to the year-to-date gains enjoyed by its regional peers against the euro.

The inflated stock market globally tells us all we need to know - investors adore increased access to money. And they are prepared to invest in the stock market once again in the hope of easing from world central banks, a very similar trend to what has been seen throughout the decade. 

This is positive news for the Chinese yuan, as well as global emerging markets. A sign from the Federal Reserve that interest rates in the US can be reduced by at least 50 basis points over the second half of 2019 will prove encouraging for investors to transfer capital back into the developing world. 

It might disappoint investors that the ECB did not pull the trigger in July, but at the same time it has firmly dangled the carrot of a future move. The Fed by all accounts has already warned the market that it will pull the trigger at the upcoming July Federal Open Market Committee (FOMC) meeting.  

The two most influential central banks in the world will also encourage more emerging market central banks to follow suit. South Korea, Turkey, India, Indonesia, Malaysia, Nigeria and South Africa are just some of the central banks to have eased policies this year.   

The People's Bank of China (PBC), China's central bank, can do the same, and likely will consider the potential of lowering interest rates in the second quarter once confirmation comes through next week that the Fed will cut US interest rates. The Chinese economy is performing reasonably well and looks to be on track to achieving the government target for growth this year, in light of tough economic conditions stemming from prolonged trade tensions pursued by the US. 

However, there are several signs of coordinated economic weakness across the globe this year, and if the trend is clear that central banks are cutting interest rates to combat global weakness, there isn't reason for the PBC to not at least consider taking similar actions.  

The author is global head of Currency Strategy and Market Research at London-based broker FXTM. bizopinion@globaltimes.com.cn