European stocks rise on weaker than expected Chinese data

Fundamental Analysis

Yesterday saw cautious trading across most markets as investors were reluctant to get too long risk assets with the persistent reports of re-escalation in Ukraine. T notes stayed bid throughout most of the day on clear indications that Russia was indeed massing troops and equipment along the border and the Ukrainian Defence Minister declaring that his army was preparing for war. However, The lack of headline risk follow-through from the morning session meant that investors gradually crept back into risk assets and equities recovered from the morning weakness and fixed income ‘safe heavens’ sold off from the middle of the afternoon through to the lows by the European close. Also helping risk appetite were dovish comments from the Bank of England’s Head Mark Carney, who gave his quarterly press conference an hour after data an hour earlier showed wage growth picking up 1% in September and the unemployment rate staying at 6%. Carney played down the prospect of imminent rate rises and said that UK inflation would likely remain below 1% for the next six months then but sounded a bullish tone on the economy and wage growth. Markets liked what they heard and the FTSE 100 outperformed its’ European peers on the day. Elsewhere, the calendar was a little light, although the US wholesale inventories offered up a slight beat on expectations, rising 0.3% M/M vs an expected 0.2%. Finally, the FX rigging probe came to the fore once again, with six banks fined by the FCA a combined total in excess of $4bn.

Today’s View

Overnight, some important Chinese data came in at slightly below expectations, with industrial output rising 7.7% in October against expectations of 8%, and retail sales came in at 11.5% versus expectations of 11.6%. Fixed asset investment, such an crucial bellwether in an investment-led economy, came in at 15.9% in October, down slightly from 16.1% in September. This was interpreted positively by European markets, with stocks rising modestly on the back of speculation this may lead to further monetary easing by the PCOB in the New Year. Pre-market, we also had some Eurzone country inflation figures, with Spanish CPI at -0.1% yoy, French CPI at 0.5% yoy and German CPI at 0.8%. Given that the ECB President Mario Draghi announced that the Governing Council were watching closely the inflation figures from the euro area as one of their two key metrics when deciding on possible QE, these continued weak inflation numbers provided a further shot in the arm from equity investors this morning. The data calendar for the remainder of today is light, in keeping with the week so far, with only US Initial Jobless Claims (previous 278k) and the EIA Crude Oil stocks change (previous 0.46) likely to impact markets. Therefore, markets will likely once again look to headline risk to drive direction as the Ukraine situation remains very much front and centre. Also, look to quotes from the plethora of central bank speakers today, with Fed Chair Yellen due to give opening remarks at a Fed/ECB event, and the Fed’s Plosser (the resident hawk on the voting committee) and Kocherlakota (arguably the most dovish on the committee) also due to speak.

Alternative View

Any commentary negating market/geo-political risk could invalidate our strategy. The volume of central bankers speaking today may also drive market sentiment, adding to the confusion of ascertaining direction.