Mario's punchbowl to stay with low inflation. FPC boosts banks

An easing of trade war tensions and further evidence of low inflation generated some optimism for European shares while the euro sunk for a third day to a two-week low. The perceived reduced risk of a trade war helped industrial companies outperform on the Euro STOXX. Eurozone inflation trickling along at nearly half of the ECB’s target implies a very gradual removal of the punchbowl. That’s a clear postive for risky assets.

Concern over the diplomatic spat with Russia does not seem to be ruffling too many feathers in markets. Russia announced on Friday that it would expel British diplomats and respond in kind to new US sanctions. Vladimir Putin looks destined to win this weekend’s election. Another six years of Putin should help maintain the status quo for energy markets via Russia’s joint supply cuts with OPEC.

Bank shares led the gains in UK markets after the Financial Policy Committee (FPC) of the Bank of England said lenders would not need to boost capital reserves. 2018 stress tests will mainatian the same standards as in 2017. Lower reserves means more funds for more lending or for putting directly in the pocket of shareholders via dividends or buybacks. NEX Group was the standout gainer, rising 30% after a game-changing bid from US exchange, CME Group.

Wall Street looked past more White House commotion, encouraged by the appointment of free-trade advocate Larry Kudlow. Reports suggested Special Counsel Robert Mueller has issued a subpoena for Trump’s businesses and that HR McMaster is about to be ousted as National Security Advisor.

Relatively stable market conditions likely reflect investors’ attention switching to next week’s Fed meeting, where another rate hike seems all but certain.