Strong German Zew Sentiment Buoys European Stocks

European stock markets are slightly higher on the session, following on from broad gains in Asia. Investors remain cautious amid speculation about the Fed’s rate hike intentions and ECB tapering. Oil prices moved off highs with WTI falling back below USD 51 per barrel, after Monday’s jump following signals from Putin that Russia may join the OPEC production cut. A slightly better than expected German ZEW investor confidence reading failed to give a real boost to the DAX, as strong data releases also increase the chances of a tapering of QE purchases once the current program ends in March next year.

WTI crude oil prices are lower on the session dipping below the 51 handle. While Putin said Monday that Russia was prepared to join the OPEC cut, which boosted oil prices, the IEA’s latest monthly report has cast a bearish influence on crude markets. The release said that the IEA has a difficult time seeing how the OPEC output cap will be implemented. The IEA assumes that a long-awaited market rebalancing would come sooner than its expectation for this to happen during the first half of next year if OPEC sticks to its new target. Traders now await this evenings API inventory report to drive the markets direction.

German Zew Came in Stronger than Expected

The German ZEW investor confidence improved in October, increasing to 6.2 from 0.5 in the previous month. Expectations were for an increase to 6, so the actually number was slightly better than expected. The current conditions indicator jumped to 59.5 from 55.1 and the rebound in orders and production numbers in August will have helped to lift overall sentiment. The prospect of a hard Brexit doesn’t seem to have spooked investors at least for now, even if in the medium term both sides of the channel are likely to feel the pressure. The ZEW is pointing to robust growth in Germany, the current conditions indicator for the Eurozone dropped further into negative territory even though the expectations index improved, and Brexit risks aside, the banking sector is also likely to remain a worry for investors

Peripheral spreads contracted substantially especially Portugal. The Portuguese 10-year yields drop sharply on DBRS rating optimism. The Portuguese 10-year yield dropped -15.4 basis points on Tuesday after Portugal’s finance minister said he heard “very positive comments and notes” from rating company DBRS, and that “the positive they have is that they feel very comfortable” about the country’s fiscal position, with the government’s expectation that DBRS won’t change the rating or the outlook.

DBRS retained Portugal’s credit rating at investment grade back in April, which means the country’s debt remains eligible for the ECB’s QE program. There had been some warnings from DBRS officials last week, which sparked concerns that the rating agency may lower its grading and that Portugal would fall out of the ECB program. The 10-year yield spiked to a high of 3.548% as a result, from just 2.7% three months ago. Tuesday’s partial correction will be welcome, but unless the rating is confirmed officially, Portugal’s yield is likely to remain volatile.