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Strong German IFO Gives a Boost to European Stocks

By:
David Becker
Published: Oct 25, 2016, 10:47 UTC

European stock markets are broadly moving higher, after strong confidence data Monday out of the Eurozone and the U.S. and Tuesday better than expected

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European stock markets are broadly moving higher, after strong confidence data Monday out of the Eurozone and the U.S. and Tuesday better than expected German Ifo reading. The Spanish IBEX, which outperformed yesterday and in opening trade today on hopes that Rajoy will manage to find sufficient backing to avoid a third round of general elections, is underperforming now amid reports that there are still challenges. U.S. stock futures are also higher after a mixed session in Asia, as Japanese stocks moved higher helped by a weaker Yen, which underpinned exporters. The DAX is currently up 0.50% and the FTSE 100 up 0.50%. The USD/CAD is has taken a respite after breaking out, as the wait and see approach is leaning toward a dovish outlook.

Oil prices are up moderately, extending the recovery from Monday’s dip that was seen after Iraq said it wanted an exemption from OPEC production cuts. The WTI is presently showing a 0.5% gain at $50.80. Prices remain just over 2% below the 15-month peak seen on October 19 at $51.93. Weekly U.S. inventory data will be released over the next day, first the private API report this evening ET, followed by the official EIA report Wednesday. The median forecast is for a 800k barrel rise, which would fractionally reverse some of the drawdowns of recent weeks. Inventories fell by over 5 million barrels in the previous reporting week, and drawdowns have been seen in six of the last seven weeks.

German October Ifo index gave a boost to riskier assets coming in at 110.5 which was stronger than expected versus 109.5 in September. The better than expected number ties in with the strong PMI readings for Germany Monday and the fact that the expectations index jumped to 106.1 from 104.5 and against expectations of a marginal rise to 104.6 is particularly encouraging. The German recovery at least remains intact and even though the French national business confidence numbers earlier came in weaker than hoped, the readings at company level were not that bad, so it still seems the overall Eurozone recovery continues as planned, despite the Brexit scenario adding uncertainty and despite the fact that the weaker Pound has lifted comparative competitive measures in favor of the U.K.

The Bank of Canada Poloz’s opening statement to the House of Commons Standing Committee on Finance contained the usual repeat of the key points of the MPR. However, he also added a discussion of the inflation framework renewed today. The track record of the framework is impressive. He addressed those doubting the effectiveness of monetary policy given the low rates but weak recovery seen since the Great Recession in many economies. He did admit, however, that at current low rates, the impact of a rate reduction is less than it would be if rates were at historically normal levels. Hence, it is important that monetary, fiscal and macro-prudential all work together, he said.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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