With the exception of the UK’s FTSE 100 index which is on course to finish flat for the week, euro zone and US stock indices have rallied again this week despite the fact that we had little in the way of corporate news to give us some colour and macro economic data was mixed at best from both sides of the Atlantic.
Mid-August is traditionally a month of low activity given that many market participants are away on holidays, but activity this week was livelier than the previous week. The driver behind this week’s move to the upside was of course, the ongoing hopes for further stimulus by central banks and the fact that we haven’t had any fresh bad news from the euro zone.
It is however, Germany relaxing on its strong resistance to giving the European Central Bank greater power to stem the crisis which has been the bringer of optimism over a viable solution to the region’s financial crisis. Two material pieces of news from Germany helped this week, one being that a German Constitutional court said it will not delay in voting on the legality of the euro zone’s rescue fund but more importantly, Chancellor Angela Merkel saying the country is committed in doing whatever it takes to safe guard the euro, re-emphasising what ECB chief Mario Draghi said three weeks ago.
Additionally, comments by China’s Premier Wen Jiabao hinted at further room for pumping liquidity, while the Bank of England’s meeting minutes left the door wide open for more quantitative easing. However, expectations for the US Federal Reserve to act have been scaled back given that US economic data continues to paint a cloudy picture – data at best is weak with the Empire State manufacturing report dropping this week but the leading indicators and retail sales a little higher.
However, the fact that data is right down the line, with no massive declines or increases on both sides for all metrics this week, markets are unsure if the Fed will actually pump more QE. If data decline, the case for QE would indeed be compelling enough to warrant it, but that’s far from the case now. So, next week, market participants are set to tread cautiously ahead of more economic data release which continue to present themselves as an event risk in the eyes of the market. We suggest investors look out of UK public sector net borrowing data on Tuesday, Fed meeting minutes on Wednesday, German 2Q GDP and PMI surveys from the euro zone on Thursday and finally UK 2Q GDP on Friday.