Well, well, well. European stocks are certainly in a good mood today. And why not? Oil prices are retreating amid hopes of easing US-Iran tensions as investors are finding reasons to put last week’s jitters behind them. The positive momentum from yesterday is carrying over into Tuesday trading, with major indices posting strong gains across the board.
- Eurostoxx +1.1%
- Germany DAX +1.2%
- France CAC 40 +1.2%
- UK FTSE +0.7%
- Spain IBEX +1.2%
- Italy FTSE MIB +1.3%
It’s a sea of green for European equities with gains of over 1% across most major indices. Lower oil prices are offering some welcome relief to the inflation outlook, particularly for Europe given its exposure to imported energy costs. So, that is giving investors a reason to reassess the economic damage from the recent energy shock over the past few months.
That being said, I’d be careful about getting too carried away with the optimism. Falling oil prices may be taking some pressure off the inflation outlook but that doesn’t necessarily mean the broader problem is going away just yet.
And with the US CPI report coming up later today, we could get yet another reminder of just how much work central banks might still have ahead of them.
Headline inflation is expected to slow to 0.3% m/m in October, down from 0.6% in September. Meanwhile, core inflation is estimated to ease to 0.2% m/m – down from 0.3% previously. Markets are still pricing roughly an 84% probability of another Fed rate hike in December, so that leaves little room for an upside inflation surprise.
For European equities, I would argue that the bigger risk isn’t necessarily the inflation numbers themselves. It is more about how US Treasury yields react afterwards. A hotter report could send yields higher, revive concerns over tighter financial conditions and take some shine off the rally in equities. On the flip side, softer inflation alongside falling oil prices could give buyers another reason to extend the recovery.
For now though, dip buyers are still holding the upper hand. But with the US CPI report still to come, there is every reason for markets to heed some caution.
This article was written by Justin Low at investinglive.com.