European session looks light with German data only highlight

• Iraq fears persist as Kerry attempts to form coalition;

• Abe’s third arrow falls of deaf ears;

• US oil exports lifted for the first time since 1970’s;

• Putin makes gesture over Ukraine, but is it enough?;

• European session looks light with German data only highlight;

• US GDP revision expected to further downgrade Q11.

European stocks look set to follow their Asian counterparts lower today as geo-political risks overcome central bank policy as the main driver of investor sentiment. A somewhat quiet European session today is expected to be trumped by the release of the US Q1 GDP revision later this afternoon. European futures point towards a negative open, with the FTSE100 -43, CAC -33 and DAX -55 points.

Iraqi fears continue to dominate currently as John Kerry spent much of yesterday trying to add a Kurdish element to the planned coalition government that will come into play on 1 July. The regaining of the Baiji oil refinery by government forces yesterday acted was a victory which have become few and far between. As time progresses towards a potential creation of a new government coalition, it is likely that markets will become more risk averse given the likeliness of US air strike and military intervention. As we have seen across many of the conflicts in oil rich regions, the first week of any conflict is typically the most meaningful for the markets where they often revert to norm soon after. Thus whilst we have seen a significant spike in oil prices, it will be the first strike by US forces that will truly impact the equity markets in a meaningful way.

Yesterday saw the release of the much fabled ‘third arrow’ from Shinzo Abe in an address from his official residence in Tokyo. This came in the form of a raft of policies aimed at stoking growth in the face of the consumption tax introduced in April. Included within this were corporate-tax cuts, trade liberalization, reduced barriers for agricultural land consolidation, special zones of lighter regulation and the possible introduction of casinos to attract greater tourism. Interestingly, Japan has long held a sales tax well below most of the major developed nations, with even their newly enhanced rate of 8% being a fraction of the 20% seen in the UK. Thus with an economy that has over 200% debt to GDP, it makes sense that such a tax had to rise. However, the decision to decrease corporate taxes seems to be aimed solely at near term growth and not upon long term fiscal stability. As such I believe the Japanese could come unstuck down the line when they finally seek to address the issue of their debt mountain and have to raise the sales tax further whilst also raising corporate tax to bring down their liabilities. The market response was somewhat muted in response to these policies where much like the Eurozone, everyone seems to be awaiting a further packaged of asset purchases rather than some wishy washy fiscal plans which could have very little impact.

Oil prices subsided temporarily yesterday with the announcement that the US is set to allow two firms to export US oil despite a ban on exports that has been in place since the Arab oil embargo in the 1970’s. Now this is clearly a tentative step towards a potential liberalisation of such imports in the face of booming US shale production and fears over Iraqi and Russian supply. However, markets have taken this to mean that we could see further global supply which would likely bring down the cost globally. However, any such move to liberalise oil exports fully would likely be faced by significant political opposition in the US as it would be expected to raise the price at the pumps for US citizens which in a nation full of gas guzzlers is never a popular policy.

Vladimir Putin yesterday asked Russia’s parliament revoke a mandate for sending troops to Ukraine, in a symbolic gesture ahead of the Fridays European summit which was expected to introduce further sanctions upon Russia. This comes amid continued violence that saw a military helicopter shot down by pro-Russian forces despite the introduction of a week-long ceasefire that only took hold last Friday. Ultimately, Putin’s gesture is unlikely to win too many over, given that the Ukrainian forces have been fighting against forces carrying Russian issued firearms and where the flow of new recruits appears to be consistently coming from Russia. Thus it will be Putin’s willingness to become involved as a mediator to resolve this conflict that will truly define whether he wants to see peace in Ukraine rather than a divisive war that could lead to yet more appropriation of land by the Kremlin.

Today’s European session looks particularly quiet today, with the release of German consumer climate data due to be released pre-market. Following a disappointing PMI report and subsequent IFO figures yesterday, there is a clear possibility of a third poor release in as many days this morning. However, on the whole this figure tends to move very little and we have not seen much volatility as a result of it’s release for quite some time. Thus we are expecting a very quiet European session.

In the US session, the focus will be upon the third and final release of the Q1 GDP figure, which appears to becoming progressively worse as time goes on. The impact of an extended period of adverse weather conditions throughout the quarter is to blame for poor hiring conditions, spending and alike. However, the revisions being touted within the markets are nothing to turn your nose up at, with forecasters looking for a figure closer to -1.7% this time around. The impact upon the markets remains to be seen given the fact that the figure is driven by weather factors and we are now only 5 days away from Q3. However, with such a downward revision potentially on hand, the release is well worth looking out for.