European Stocks Move Lower as the FOMC Balance Sheet Creates Concern

European stock markets are mostly down, following on from broad losses in Asia, as investors digest yesterday’s FOMC minutes, which showed that the Fed discussed scaling back its balance sheet later in the year. The Nikkei closed with a 1.40% loss, ASX and Hang Seng also declined and in Europe the FTSE 100 is down nearly -0.50% and the DAX down a similar amount.

Eurozone markets managed to claw back some losses and CAC 40 and the Spanish IBEX are slightly higher, after ECB President Draghi tried to draw a line under rate hike and tapering speculation, but investors remain cautious ahead of the Trump Xi meeting and key U.S. jobs data. Oil prices meanwhile are little changed. The upcoming ECB minutes meanwhile will give further inside into the increasingly diverging view at the ECB council.

WTI crude is showing a gain, at $51.29, though remains off yesterday’s one-month peak at $51.88. The gain marks a notable price action as it follows rise in U.S. inventories in the latest reporting week, with the lack of sustained selling suggesting there may be a shift in the underlying demand/supply balance in the crude market, which tallies with reports of tightening supply in Asia.

German February manufacturing orders rose 3.4% month over month, slightly less than anticipated, but with January revised up to -6.8% month over month from -7.4% month over month, the annual rate nevertheless jumped to 4.6% year over year. Domestic orders rebounded strongly from the slump at the start of the year, while export orders stagnated as a dip in orders from other Eurozone countries, the second in a row, counterbalanced a rise in orders from non-EMU countries. Domestic capital goods orders, a gauge for future investment picked up 4.2% month over month.

Eurozone Retail PMI Declined in March

The Eurozone retail PMI fell back slightly in March, with the reading declining to 49.5 from 49.9, thus indicating contraction as Italy and France and decline. The later timing of Easter this year may lead to some distortions over the March/April period and we would expect an improvement in the overall number in April.

FOMC minutes showed that members could alter the reinvestment policy sometime later in 2017.  How this would occur and when it would occur is up to debate.  Many believe that the reduction in the balance sheet should have a passive approach. Also, both Treasuries and MBS should be a part of the reinvestment changes. But, there was also discussion of costs and benefits of phasing out or ceasing all at once the reinvestment of principal.