European Shares Hit Fresh Highs Following Oil Rally

European stocks are mixed as the DAX and FTSE 100 hit new record highs before profit taking generated a pullback in price action. The surge in oil prices underpinned higher stock markets in Europe as the FTSE 100 rose to a record high of 7460 and the DAX was above 12800 before equity bourses pulled back. The FTSE 100 is still hanging on to marginal gains, but the DAX is now down on the day. Elsewhere in Eurozone markets are narrowly mixed at high levels.

Asian stock markets are mixed, with Nikkei closing in negative territory, while the Hang Seng moved higher in tandem with mainland China indices, underpinned by optimism over infrastructure spending as Xi Jinping prepared a framework for Chinese-style globalization and pledged USD 78 billion in funding. Optimism was slightly dented by a reported slowdown in production growth, but still left the CSI in positive territory. Oil prices rallied amid signs of a supply cut, after energy ministries from Saudi Arabia and Russia said the OPEC deal should be extended.

Crude Oil Soars on New Proposed OPEC Production Agreement

WTI crude futures are up 3.0% at $49.20, hitting a 2-week high. The rally was sparked by Saudi Arabian and Russian energy policymakers saying that the present run of coordinated oil supply cuts will be extended to March 2018, three months longer than current anticipated six-month extension to the end of the 2017. The proposed extension will be on the same volume terms as in the standing accord. The new deal will likely be ratified at the OPEC meeting on May 25. The Saudi oil minister said that “there has been a marked reduction to the inventories, but we’re not where we want to be in reaching the five-year average.”

Bundesbank’s Dombret calls for a reform of sovereign risk rules, highlighting that the risk of default is low, but not zero. Dombret welcomed that “the Basel Committee has put sovereign risk on its agenda for 2017 and 2018”, and stressed that “for the euro area, reforming the regulation of sovereign risk will be even more vital”, as “a currency union is particularly vulnerable to national distress in case that market forces break down”. And in order to address the “unhealthy relationship” between government debt and domestic banks “non-zero risk weights as well as concentration limits for sovereign exposures” are needed.

Italian HICP inflation was confirmed at 2.0% year over year, in line with the preliminary number and up from 1.4% year over year in the previous month. This level is the ECB’s target. As elsewhere in the Eurozone, the zig-zag course over the March to April period was mainly due to the Easter effect, which meant holiday related prices rose later this year than in 2016. May should bring a normalization and a clearer picture of underlying trends.