EU Economic Update – 29 September 2014

European equities fall on Syria strikes; growth divergence also a key driver

European equities fell last week as confirmation emerged that allied forces were to attack insurgent positions in Syria, an area that was previously off limits due to threats from the Syrian regime.

In addition to the evolving middle eastern situation, a divergent economic outlook between the EU and the US also contributed to price action as investors and traders continued to price in a 2015 rate rise from the Federal Reserve. This was while economic data emerging from the continent further highlighted an already bleak outlook.

One of the key data releases for the week was the German IFO Business Climate Index, which fell considerably further than expected; indicating that the outlook for businesses in the euro-zone’s largest economy worsened during September.

In tandem with business sentiment German consumer confidence also stepped backward during the month, according to the GfK Consumer Climate survey. This was while manufacturing and services PMI numbers confirmed a murky outlook for the economy.

Here, the Markit Manufacturing PMI fell further than expected from 51.4 down to 50.3, while the smaller services sector received a boost from a minor improvement in its PMI reading.  

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Another sick child of Europe

Although some peripheral nations have made notable progress toward fiscal consolidation and growth, the Italian economy has become the focus of increasing concern during the third quarter. Last week’s data did little to alleviate this.

In detail, Italian retail sales contracted during July according to lagging survey data released on Thursday. Of the nine monthly releases in 2014, the September issue marked the eighth time that retail sales have either contracted or stalled at the break-even point.

This news comes on the back of increasing scepticism over the country’s ability to reduce spending and to tackle deep seated fiscal problems as the European periphery grapples with both deflation as well as weak external demand.

As a result, we expect pressure upon the ECB to continue to build during the weeks and months ahead.

European Indices

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