The Week In Hindsight, 21 July 2014

European indices traded sideways last week as mixed economic data emerged from all corners of the globe and investors reacted to news that a commercial airliner had been attacked in the skies over Ukraine.

In detail, Chinese Q2 GDP set the foundations for a positive performance from equity markets with a better than expected print of 7.5%, VS a forecast for quarterly growth at 7.4%. However, positive momentum was not sustained as better CNY data was accompanied by poorer than expected retail sales figures from the US, and a cautious tone toward the economy from Janet Yellen during her appearance before congress.

The mixed economic news came ahead of Thursday’s reports that a commercial airliner had been attacked and shot down from the skies above Ukraine, which has now led to broad expectations for heavier sanctions against Russia over the coming days.

In short, while indices managed to avoid any serious correction the outlook for European equity markets and economies going forward is clouded with uncertainty. This is because the death of nearly 300 European civilians makes further, and more severe, sanctions against Russia highly likely. Although it is not possible to say exactly what these sanctions will be, it is thought that they will probably target Russia’s energy sector given its dominance over the economy.

Should this evolve to be the case then an adverse impact upon European economies would be difficult to avoid, given their dependence upon Russia for energy (30% of supply). The most probable effect would be in the form of higher (energy induced) inflation, which could have a knock on effect upon confidence, investment and general economic activity.

Further implications of this scenario, if protracted over time, could include lower growth figures for 2014 and a prolonged period uncertainty and stagnation. Each of these are conducive to high levels of uncertainty surrounding regional economic growth, which is supportive of expectations for increasing volatility across equity markets over the medium term.

In the immediate future, the week ahead sees French & German Manufacturing and Services PMI’s released with bullish forecasts in place for both. In addition, the German IFO Business Climate survey is due for release on Friday.

Elsewhere in the world, US inflation data for the month of June will provide a further insight into the direction of sentiment toward monetary policy as well as the economy over the weeks ahead. This is while Q2 growth figures for the UK will cast a light over the most recent pace of economic expansion  when they are released on Friday.

EU Indices