Europe back in focus

Another rough day for equity markets as investors continue to wonder if this is another pausing for breath or the start of a greater correction. As the Federal Reserve confirmed on Wednesday that, all things being equal, they would finally wind down the bond purchase program. However, economic data from around the globe undermined investor sentiment. Overnight, disappointing Chinese export data and a sharp fall in May Japanese machine orders meant equities opened on a weak note on Thursday.
 
Europe added to the concerns during the day as industrial Production fell in France and Italy, and French inflation fell to 0.5%. The euro area periphery was brought back into focus as Portugal’s Banco Espirito Santo’s parent company delayed coupon payments to some short-term debt securities. There has been a modest sell-off in peripheral debt over the past couple of days, but at present no real signs of panic. The euro weakened slightly on Thursday, but remained close to its recent trading range against the U.S. dollar. U.S. treasuries remain well bid as the 10-year yield fell to 2.52%. Thursday’s weak euro area economic data will intensify pressure on the ECB to introduce more measures soon to stimulate the regions economy.
 
In the UK, the Bank of England left interest rates where they were at 0.5%, which was expected. The Bank of England publishes its next quarterly inflation report on the 13th of August. On that day, Mark Carney will once again give his latest outlook for the UK economy, and economists will analyze his comments for any clues as to when to expect the first rate rise.
 
Burberry and AB Foods both announced results on Thursday, and despite solid outlooks, both companies referred to their profits being impacted by the continued strength of the pound. This could be a theme for the upcoming earnings season and possibly why the FTSE 1OO has failed to push on in the past year. A Bloomberg Industries report on Thursday forecasted that the FTSE 100 will yield over 4.5% in 2014, with 10-year gilts currently offering 2.63%, that gap seems too wide to ignore.

Posted on July 11, 2014 .