Gaza conflict drawing to a close, but at what expense?

- Markets cautious despite dovish outlook from jobs report

- Possible effects of Russian sanctions impacting sentiment

- Gaza conflict drawing to a close, but at what expense?

- Spanish unemployment expected to fall further

- UK construction PMI likely to fall

European markets are looking for a positive open despite a somewhat mixed bag over in Asia, where dovish sentiment derived from Friday’s jobs report did little to spur buying. The substantial sell-off seen last week is still fresh in the mind as traders seek to determine whether this is just an anomaly within a clearly defined uptrend, or else a sign of something more significant. European markets are expected to open higher, with future markets pointing towards the FTSE100 opening +17, CAC +15 and DAX +12 points.

The overnight session saw somewhat of a damp squib which failed to muster much positive sentiment despite the fact that Friday brought about a somewhat dovish jobs report which saw payrolls fall by 91k. However, with Thursday seeing the likes of the Dow wipe what was remaining of this year to date’s gains, some caution has crept into the market. There has been a lot of talk regarding the threats within the markets, with geo-political fears being compounded by weakening volumes. Something had to give and it did so in spectacular fashion. The ability of markets to bounce back throughout the recent bull market has been driven by the willingness of investors to buy into the dips. This could come into fruition today, however there seems to be an initial unwillingness where we seek signs that the worst is over.

From a geo-political standpoint, most of the market threats should now be factored in, with potential Russian sanctions having been a hot topic for some time now, whilst the Israeli military campaign in Gaza seemingly approaching the end as troops began pulling back yesterday. However, the report from Adidas which saw a profit warning of -12.5% owing to a sanction driven loss of business in Russia has now been reflected in many of the 40 or so blue chips which derive over 5% of their revenues from the Russian market.

The conflict in Gaza has been building both in intensity but also in terms of international outrage given the degree of civilian casualties in the region. However, yesterday did show some signs that this could be coming to an end in the near future as the majority of troops pulled back to near the Israeli border. The military campaign which focused upon crippling Hamas and removing the threat of the underground tunnels that have been built to enter Israel. However, the methods undertaken have been deemed as disproportionate and the feeling is that this has the ability to drive further radicalisation across the Middle East. With ISIS advancing into Kurdish regions of Iraq over the past few days, it is clear that they are gaining in strength. Thus given their end goal of confronting Israel, I believe the actions in Gaza will drive the popularity of ISIS higher at a time when it is becoming increasingly difficult to see a solution to the problem.

Looking ahead to the European session, it looks moderately interesting from an economic standpoint. The release of the Spanish unemployment change figure is trumped only by the construction PMI figure out of the UK. Spanish unemployment has been making the long and protracted move towards a respectable unemployment rate in recent months, with the country experiencing some of the worst labour market conditions of any European nation. However, in recent months signs have been pointing towards an improvement of sorts. The cyclical nature of Spanish unemployment means that we typically see a fall in the months of May to august and this is happening yet to a greater extent. Expectations point towards another solid fall of -116.3k which would show that things are starting turn around, albeit gradually.

In the UK, the construction PMI figure is expected to bring somewhat of a less positive outlook, with median estimates pointing towards a fall from 62.6 to 62.0. The slowdown in the housing sector has been gradual in the past month or so and for many this has taken the form of a more ‘normal’ demand for houses rather that the frenzied clamour we have grown used to in the past year. With this, the construction sector as a whole is likely to suffer somewhat as valuations of projects begin to fall. Thus I believe we will see this figure pull back somewhat in H2 as interest rate hikes become ever nearer and investors become more cautious.