The equity rally in Europe continued in the US with S&P500 closing up 0.3%

Market movers today

• Focus will continue to be on the international geopolitical situation, albeit tension at least for now appears to be easing. In Ukraine the risk of an imminent Russian intervention appears to have eased after Russia yesterday announced that major military exercises along the Ukrainian border have ended. However, so far there are no signs that the Ukrainian government will stop its offensive in eastern Ukraine and it remains a major uncertainty how Russia will respond to the outlook for a possible Ukrainian victory. In Gaza the three-day temporary cease-fire is holding and negotiations about a permanent ceasefire restarted yesterday in Cairo. Finally, in Iraq the US bombings appear to have halted ISIS’s advance.

• We have a relatively light data calendar today. In Europe the most interesting release is the German ZEW business sentiment indicator for August. We expect both current conditions and the expectations component to have declined further, underscoring that the German export engine has lost some steam recently.

• In the US the Small Business Confidence for July also deserves some attention. Although it declined slightly in June, it remains strong with more and more companies reporting that they intend to increase prices and have difficulties filling vacancies.

• In the Scandi markets focus will be on the Swedish inflation, see more on page 2.

Selected market news

The equity rally in Europe continued in the US with S&P500 closing up 0.3%. The move higher followed as sentiment had improved due to the waning geopolitical tensions, which was further supported by an agreement for an international humanitarian convoy with participation of the EU and Russia, see FT. However, at time of writing NATO expresses concerns of a disguised invasion as it has just been announced that a Russian convoy with 280 heavy trucks containing humanitarian aid for Ukraine has departed from Moscow.

The risk-on sentiment remained although there has been news that the political crisis in Baghdad escalated as the Iraqi Prime-Minister Nouri al-Maliki refused a transition to the Obama-supported Haidar al-Abadi, who might better unite the different ethnic groups of Iraq, as his successor. Maliki has further increased the presence of troops and militia in Baghdad, which has spread a sense of crisis in the capital, see WSJ.

In the euro area the Eonia fixed at 0.01% and is back at its previous low. The move lower has followed after the ECB introduced a negative deposit rate in June. The negative rate was expected to drive down yields as liquidity would be passed between investors like a ‘hot potato’ with no one wanting to get burnt by placing the excess liquidity at negative with the central bank. The search for yields should also support peripheral government bond markets, reduce fragmentation and in that way stimulate growth and in turn put upward pressure on inflation. We believe the ECB is satisfied with lower yields and wants to see the macroeconomic impact before taking further easing measures.