Japanese CPI falls yet again

• Yesterday’s sell-off driven by geo-political fears

• Japanese CPI falls yet again

• German consumer confidence likely to tumble once more

European markets are expected to open mixed as they try to determine whether the follow the US and Asian indices lower following the largest one-day decline in the Dow since 31 July. Driven primarily by rumours out of both Russia and Iraq, those losses could be brushed off or highly relevant, depending on what you believe. However, with Japanese CPI pulling back, a German consumer confidence survey expecting to fall, and the UK likely to announce their willingness to act in Iraq, there is little to be positive about today. European markets are expected to open mixed, with the FTSE100 +2, CAC +3 and DAX -14 points.

Yesterday saw a somewhat hum-drum trading environment lead to the deterioration across global indices, from Europe to the US and subsequently Asia. In part this selling came as a response to two major pieces of geopolitical news, as a potential ISIS attack in the West was accompanied by rumours of a drastic piece of legislation that is being drawn up in Russia. Firstly, the Iraqi PM Haider al-Abadi warned of an impending ISIS plan to attack both the Paris and New York transit systems, throwing the possibility of another 9/11 style attack back onto the table. Secondly, rumours emanating from Russia suggested that there could be plans afoot for a move towards allowing the seizure of foreign assets, which would no doubt throw those closely tied European economies back into recession in the not so distant future. This move would serve to cripple both European business but also would throw Russia back to the cold-war style era where all foreign investment that was able to would pull out and leave the economy to be isolationist once more.

The release of the August CPI reading out of Japan didn’t make for pleasant reading for many, with the headline measure of inflation pulling back for the third month in a row, prompting immediate calls for increased stimulus from the BoJ. The election of Shinzo Abe came amid a core principle that he would end the incessant deflation that has plagued Japan for decades, and return it to a 2% inflation environment by Spring next year. Whilst he has fulfilled the first of these mandates, the second is becoming increasingly elusive and thus the time could be arriving for a move in monetary policy to achieve the final piece of the jigsaw. Stripping out the 2% rise that was attributed to the sales tax hike in April, the subsequent figure of 1.3% is the lowest level since October 2013 and proves that the recent trend is no short term phenomenon. The BoJ will have to act, and act soon should they wish to get price growth back on target towards 2%.

Today we expect to hear from the UK government where the official request from the Iraqi government to provide military assistance in their fight against the ‘Islamic State’ means that we are almost certain to see the commons vote in favour of British involvement in yet another Iraqi war. For the most part this seems unavoidable, with the UK estimated to represent the second highest source of European fighters that have joined the ranks of ISIS, behind France. The role of ‘Jihadi John’ in engaging Western nations against the terrorist group comes as a stark reminder that this is an international group that is being targeted, where radicalised people from around the world have joined the ranks and hold senior positions which could pose an existential threat to lives both home and abroad. Nevertheless, the involvement of the UK in Iraq can be seen as both inevitable yet far from ideal, with markets responding to any major development in the fight against ISIS as a cue to risk off trading, which can perpetuate the losses seen in the indices so far this week.

The release of a German consumer confidence survey this morning is expected to pile further pressure upon Angela Merkel and Mario Draghi following a shocking week for the German economy which saw the manufacturing PMI approach contraction, the business climate survey post the lowest level since April 2013, and a threat that Russia may seize foreign assets. Estimates for today’s survey are conservative, yet given the trend we have been seeing I believe we will see a more protracted move lower to reflect the poor growth, jobs and inflation environment within Europe’s biggest economy.