Risk Returns, but Tensions Remain

European stock markets recovered some of Tuesday’s losses as global risk aversion receded, but are already down from earlier highs and while the DAX remains up on the day it is struggling to hold the 12000 mark. Eurozone markets failed to get a lift from strong ESI economic confidence numbers, which together with the uptick in German state and Spanish inflation numbers reviving tapering concerns. A stronger Pound meanwhile is limiting upside room for the FTSE 100. Global stock markets started to stabilize in the late U.S. session yesterday and after Wall Street managed to close with modest gains, the improvement continued during the Asian session, with Nikkei and Hang Seng leading the way and closing with gains of 0.74% and 1.19% respectively. CSI 300 and ASX 200 moved sideways. U.S. stock futures are also up, but the tropical storm, Harvey continues to cause havoc, and North Korea tensions are unlikely to fully go away for a while, geopolitical risks will continue to hang over markets.

Eurozone ESI Confidence Was Stronger Than Expected

Eurozone ESI economic confidence much stronger than anticipated. The headline reading jumped to 111.9 the highest since July 2007. Manufacturing, as well as services and consumer confidence improved in August and the data, confirms that overall growth remained strong in the summer quarter, which will back the ECB’s gradual move away from adding ever more stimulus. The September staff projections could well lift the short-term growth forecast for this year, even if geopolitical risks and the stalling Brexit talks continue to cast a shadow over the medium-term outlook that will back the call for more flexibility on monetary policy from ECB council members going ahead.

German state inflation data picked up in August. CPI data from German states confirm expectations for an acceleration in the pan-German headline CPI rate and we continue to see HICP rising to 1.7 %year over year in line with expectations, from 1.5% year over year in the previous month. Preliminary Spanish HICP, released earlier today, showed the headline rate already touching the 2.0% year over year upper limit for price stability, but while the overall Eurozone number, due Friday, is expected to nudge higher, it will likely remain firmly below the 2% limit. At the same time, the stronger than expected Euro will leave its mark on the updated set of staff projections in September. Still, with inflation nudging higher and growth indicators pointing to ongoing improvement on labor markets, the ECB is heading for a change in direction next year.