With all that’s wrong in Europe, the region’s equity markets have remarkably produced gains again this week, reaching a four-month high. There’s no doubt that we are in bull market zone as investors appear relatively sanguine in their approach to economic data from the euro zone which continues to deteriorate. It seems that European Central Bank President Mario Draghi’s fighting words to safe guard the euro zone continue to resonate. Hopes that he and leaders across the region will approve firing a “big bazooka” type stimulus plan, most likely buying peripheral sovereign bonds, appear to be supporting risk assets for now.
At the same time, optimism around the Federal Reserve turning on the printers again by pumping more quantitative easing have gained traction. Last week’s policy meetings by both central banks saw no fresh measures announced but the doors for more stimulus were left wide open. Of course, this would suggest that if both central banks sit on their hands and fail to respond soon, risk assets will start to sell-off. Indeed, we have seen that scenario come into play this week, with no thanks to the fact that we are in silly summer season where activity is overall extremely low.
By mid-week, we started to selloff on that realization that we could be waiting a little while yet before the ECB and Fed kick down the door and fire rounds of stimulus. Though these hopes remain on the whole, perhaps bold measures won’t be as forthcoming as some may have hoped at the start of the week. In fact, it is more likely that meaningful progress on the central bank easing front will not materialize until the September monthly policy meetings. U.S. economic data this week has been rather resilient and Spanish bond yields have eased off dangerous highs, so the red button doesn’t need to be hit just yet.
With major European indices such as the FTSE 100 in the U.K. and the DAX in Germany, both sitting at such attractive levels, while the Standard & Poor’s 500 in the U.S. pushed above the 1400 level, the temptation to book profits has proved far too great for stock investors. Expect this attitude to continue next week, though with the Olympic Games in London coming to an end this weekend, we could see activity pick up a touch. What should help with providing markets some much needed direction will be a raft of Teir-1 economic data releases. The ones to lookout for include the German ZEW survey, U.S. retail sales, U.K unemployment figures, U.S. Empire State manufacturing data and University of Michigan confidence report.