German GDP expected to confirm avoidance of recession

• Nikkei rises despite less dovish minutes

• OPEC meeting expected to see oil output cut

• German GDP expected to confirm avoidance of recession

• BoE inflation report hearing put pressure on Carney over falling inflation

A cautious yet positive start to the day is expected for the European markets today, following the establishment of record highs in the US and a largely positive session overnight in Asia. The largely hawkish news overnight from the BoJ minutes were to an extent brushed aside as traders instead focused upon the expansive global outlook for monetary policy. As such, European futures are pointing towards a positive open, with the FTSE100 +4, CAC +3 and DAX +17 points.

The big news overnight came from the Bank of Japan minutes, following the introduction of a heightened rate of asset purchases; from Y50 trillion per month to the current Y800 trillion. The shock in the market was highlighted by the 320 pip rise in USDJPY that day, where very few if any analysts saw the move coming. Given this, it comes as no surprise that the BoJ committee found a weak majority to carry the action through, with only 5 out of the 9 members voting to increase asset purchases. The minutes showed a great degree of anxiety over whether the benefits of an increase in asset purchases really outweighed the negatives. This narrow victory for the doves, alongside a clearly apprehensive narrative running through the committee meant that for the time being, it is unlikely we are set to see another such move in the next few months. However, with a speech from Kuroda today driving home the point that he would not hesitate to implement further QE should the Japanese economy need it, there is clearly an ultra-dovish Governor in charge at the BoJ and this can be a decisive factor when trying to push through less unanimous policy changes as was the case at the last meeting.

There has been significant discussions regarding Thursday’s OPEC meeting, at which some expect to see a cut to supply as a means to draw a line under oil price weakness that has severely diminished the ability of member nations to generate like for like cash flow from their exports. The announcement from Russia that they are currently losing around $100 billion per year owing to such oil prices shows the effect this can have upon highly oil dependant nations and as such it comes has no surprise that action is being considered. However, with revenues falling for members, it is likely that many will feel that unless their capital reserves are large, they may wish to export more rather than less, to retain a consistent level of funding. After all, the length of time it will take that global supply cut to reach market prices is an unknown.

Today’s European session sees the final German GDP figure released, with expectations pointing towards confirmation of that 0.1% month on month growth which avoided a recession. Yesterday’s IFO business climate survey finally saw some strength come back in to German sentiment and this was for a large part due to the fact that the economy managed to stave off a dreaded recession. However, with risks and weaknesses clearly remaining, I would not be surprised to see this move lower today which could cause a shock to the markets.

We are also due to hear from Mark Carney and the BoE at the inflation report hearings in London. The downward trajectory of inflation within the UK has been a cause for concern in the BoE, pushing expectations of an interest rate hike further into the future. This appears to be a global phenomenon, driven in a large part by falling energy prices. However, with Carney having recently lowered his expectations of inflation, to the extent that he forecasts a level below 1% in the near future, it will mean a letter will have to be written to explain his reasons for such a move to the Chancellor. It is likely that this extreme situation will be cause for concern at the Treasury Committee and I expect to see greater clarity provided regarding inflation expectations, along with the reasons for such low price growth. Markets will be on the lookout for any reason to change their perception of when rates will rise and for this reason, volatility could characterise this event, due at 10am GMT.