The Week In Hindsight, 01 August 2014
European equities stabilise after last week’s decline
Continental equities stabilised at the open on Monday as a sparsely populated economic data calendar left investors to continue contemplating the implications of both last week’s US data as well as the early morning revelation that Banco Espirito Santo is in line to receive a 6 billion euro bailout from the Portuguese government.
The docile start to Monday trading follows a volatile close to last week, where global equity markets were driven lower on concerns that rising US inflation could force the FOMC to raise interest rates earlier than markets had previously priced.
Going forward and in line with our previous statements, we expect the timing of interest rate rises in the UK and the US to become the predominant source of volatility across equity and bond markets over the months ahead. Key to evolving sentiment here will be labour market data and inflation.
ECB in focus
European inflation fell to its lowest level since 2009 during July, according to data released last week. The actual reading (Flash CPI) came in at just 0.4% VS an official forecast for 0.5%, with much of the month’s decline attributable to lower food and energy prices.
While the general consensus is that the current deceleration in food and energy prices will wane over the months ahead, July’s data highlights the conundrum facing the ECB going forward.
With German economic momentum relatively robust, but reform efforts within peripheral economies continuing be hampered by falling prices and a relatively strong currency; the ECB’s ability to prioritise and balance the interests of both sides when crafting policy will continue to be tested over the remainder of 2014.
With its August meeting and press conference just days away, investors will be watching closely for any hint of a more dovish view among European policy makers.
While we do not expect any new policy measures to be unveiled it is likely that Mario Draghi will repeat that asset purchases are within its mandate, before reiterating the Governing Council’s commitment to maintaining price stability on the continent.
In summary, monetary policy remains the predominant driver of global equity markets at present. While the ECB looks set to ease policy further over the months ahead, both the Federal Reserve and the Bank of England are likely to tighten.
For the purpose of this update we are concerned only with equities, however; such divergent policies create opportunity across all asset classes for investors. Our central view going forward remains that continental equities, despite having appreciated substantially over the last 18 months, still have further to run.
With blue chip earnings now stabilising, but still below their pre crisis levels; we believe that European companies offer greater upside than their UK and US counterparts. Consequently, we remain attracted to Europe and shall continue to monitor developments in this regard.
The next major event scheduled for the European economies, away from corporate earnings, is the ECB rate announcement (1245) on Thursday, which is followed by the usual press conference (1330).
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