Europe: Can it withstand Trump’s higher rates? - Scotiabank

Research Team at Scotiabank, suggests that European markets will have plenty of local market data to consider this week but it may be a stretch to see it as having an influence upon the global market tone.

Key Quotes

“A grander debate is the outlook for the ECB following comments by ECB Executive Board member Yves Mersch that warned against “excessive expectations” for further stimulus. Whether this reflects a break from past moments when the ECB played up expectations too much in advance and wishes to surprise with stimulus this time, or whether it signals reticence toward extending stimulus perhaps because post-Brexit and post-US election markets have been quite resilient remains unclear. I continue to think it’s unrealistic to expect the ECB’s QE program to simply expire come next March.” 

“The backing up in European government bond yields since early October was enhanced by the US election results after November 8th. This is significant to the ECB for two reasons. One reason is that the European economy remains frail with ongoing challenges in the banking sector such that this could motivate the ECB to take action to avoid the recovery short-circuiting after better-than-expected post-Brexit data. Perhaps more important is that the backing up in bond yields affords the ECB the opportunity to increase bond purchases even without having to adjust the current terms of the capital key. This debate will preoccupy ECB-watchers right up to the December 8th meeting and beyond.”

“Data risk will be centered upon the following:

1.  Eurozone purchasing manager indices: These will be updated with November readings on Wednesday. The composite reading that combines the manufacturing and service sector readings was little changed in the first post-Brexit print, then fell a little, and then climbed again. Thus, it has said little about the economy on net following Brexit and it is too early in the Article 50 application process to judge growth signals like this.

2.  Q3 GDP revisions:  The second pass at Q3 growth in the UK will come on Friday and consensus expects a repeat of the 0.5% initial estimate. Details behind the initial estimate of German GDP growth during Q3 will also be released so we’ll have a greater understanding of what drove the tepid 0.2% q/q gain.

3.  Germany confidence:  IFO business confidence for November comes out on Thursday, and GfK consumer confidence arrives Thursday.

Relatively minor developments will include updates for monthly UK services data, Italian industrial sales and orders plus retail sales, and Spanish trade.”