Is German business confidence at a top?

• Global rally based on low volumes;

• UK inflation report expected to be more hawkish;

• Is German business confidence at a top?

• Iraq fears persist as Kerry promises sustained US involvement.

Another tentative open is expected in European markets this morning as we see indecision of sentiment following a somewhat mixed day in the markets yesterday. The release of particularly positive factory data out of Japan, China and the US was marred somewhat by a poor Eurozone report which saw France slip even further into contraction whilst the German expansion grew at a slower rate. Subsequently, the feeling is mixed is the futures market, where the FTSE100 is expected to open +5, CAC +2.5 and DAX -1 points.

The most hated rally in history continues to advance forward with the S&P500 hitting all-time highs on an almost daily basis over the last week. The clearly defined primary bull market clearly encourages market participants to go long and this would have been a highly productive stance over recent years. However, with increasingly low volumes behind such moves, we have seemingly hit another point at which many believe the benefits of being in the markets only marginally outweigh the negatives. As such, I see a market where traders are forced into long positions, yet do so without too much conviction which means that any downturn is likely to be sold into rather than bought into. However, for this to happen the markets would need volume and whilst that is not apparent, the slow but steady train can keep chugging.

Today’s European session look to focus upon the BoE’s UK inflation report hearings which have shown the markets time and time again that they can be the source of significant volatility. The discussion centres around projections for employment, growth and inflation which has obviously linkages with the rate of change in monetary policy going forward. Mark Carney has become increasingly hawkish in the weeks since last month’s inflation report where he likened the UK economy to a nation attempting to progress through the qualifying rounds of the world cup. Unfortunately the World Cup analogies are likely to be few and far between this time, and with Carney having said that he believes rates will rise earlier than many expect, his tone is expected to be more hawkish too. The UK economy is the best performing of the major developed nations and that is likely to be the reason why there are grounds for optimism. However, with weaknesses still evident within the employment market and the housing starting to cool off, there are also clear reasons to hold off on interest rates for the time being.

Also this morning, the German business climate figure is expected to draw significant attention following yesterday’s poor PMI showing. A key barometer of economic health, the IFO survey provides us with a leading indicator of current market sentiment and forward expectations of 6 months’ time. Recent months have shown signs of a peak within this measure forming, given it’s stagnation throughout 2014. However, with question marks hanging over the Eurozone right now, the last thing that is needed is yet another weak data point for the strongest and most important economy.

In Iraq, US secretary of state John Kerry has promised ‘intense and sustained’ US support for the Iraq government and population. This comes off the back of a claim that the incumbent government has agreed to form a new cross-cultural government by 1 July. Unfortunately for Kerry, he is unlikely to be able to remove the divisive Prime minister al-Maliki, yet a government that represents Sunni, Shi’ite and Kurdish interests is likely to be the only way to create unity against ISIS. Ultimately the markets will be looking to see what type of military involvement the US takes with the likely response to be a more risk off scenario. As ever, oil and gas prices are also being impacted by this crisis, with both pushing ever higher overnight at the announcement that ISIS have taken control of the main oil refinery at Baiji, south of Mosul.