Eurozone CPI expected to dominate European session

• Yellen pulls back from micro commentary

• Time Warner bid shows M&A market continues to boom

• Potential second corporate default brings risk off view to China

• Eurozone CPI expected to dominate European session.

European markets are looking a little downbeat despite a fourth day of growth in Asian stocks. That being said, with yesterday representing one of the strongest days of upside in over four months for the FTSE100, perhaps a move to pare some of those gains was always likely. A light overnight session is looking to give way to a somewhat one-dimensional European outlook with Eurozone CPI providing the single major release ahead of the US open. European markets are expected to open lower, with the FTSE100 -16, CAC -10 and DAX -12 points.

Janet Yellen’s two day testimony in Washington drew to a close yesterday, as she fielded questions from the House financial services committee. This was largely a non-event, with an identical initial statement matched by fairly similar question to that pitched by the Senate. However, it was notable that Yellen took a step back from her initial comments regarding the fact that she sees concern over biotech and social-media company valuations. On this occasion, Yellen stated that the Fed doesn’t necessarily target equity valuations, with valuations seeming to be at historical norms.

However, I am sure Yellen will pay close attention to the ongoing M&A boom which continued apace with the $80 billion takeover bid from 21st Century Fox for Time Warner. The ongoing environment of major M&A activity is a sign of booming balance sheets and economic confidence within the markets. Thus whilst we continue to see major takeover bids such as this, it points to yet further strength within the markets as firms make the most of record low interest rates and growing revenue streams.

In China, signs are pointing towards a possible second corporate default in what is the worlds largest corporate debtload. The default of Chaori back in March rang alarm bells for many in the markets, given Chinese unwillingness to let such a thing happen in the past. However, at that point we asked whether this was going to be the first of many. Thus the announcement that Huatong Road & Bridge Group Co. may be the second to go down the default path is highly notable and brings a more risk off scenario for investors.

The major event of the day comes from the Eurozone, where the latest CPI figure looks set to provide yet another test of Mario Draghi’s monetary policy framework. Weak inflation has been the single most persistant problem for Draghi in 2014, as a threat of deflation has turned even the most ardent hawk into a dove. Markets have been baying for a gutsy response from Draghi and in turn he decided to throw everything but the kitchen sink at the problem, expecting that the likes of negative deposit rates and TLTRO’s will reverse the downward trend in prices. However, this is likely to take some time to significantly affect CPI and as such markets are looking out for a steady figure of 0.5%. By all means, a steady figure is better than another drop in price growth, yet with CPI standing at the lowest level in 4 ½ years, we are beginning to approach a now or never moment where any further decrease could call for drastic measures. Those measures would surely have to come in the form of asset purchases, which remains the one golden card Draghi has yet to play. It does not come without difficulties and as such he would most likely prefer not to resort to such drastic measures. However, as months pass and the expectations grow in response to Draghi’s recent actions, we have to see a shift in CPI or else markets will begin pricing in a high likeliness of asset purchases.