Equity markets continued to grind higher on Thursday in the face of, not totally unexpected, weak data out of Europe. If there was a plus it was the euro area inflation data was confirmed for July at 0,4% year on year, there could have been concerns that figure could have been revised lower. The same cannot be said for the month on month rate that came in at minus 0.7%, against expectations of minus 0.6%. The euro area GDP report showed that the region as a whole failed to grow at all in the second quarter. Germany in particular suffered in this quarter as its economy shrank 0.2% from the first quarter.
The Dax index of leading German shares rose, as did the broader Stoxx 50 index of leading European companies, as investors had probably already baked this weakness into their expectations. For those who think that US treasuries are over priced should take note of the German bund as the 10-year yield fell below 1% at one stage on Thursday. The other reason equities in Europe held up today was, as one has to assume that today’s figures will continue to put pressure on the ECB to act, hence the sanguine reaction from equity investors.
It is also worth reiterating that currently with virtually no inflation in the euro zone economy, German 10 year bunds offering no more than 1%, and with the Dax index down on the year offering a yield enhancement of approximately 2% above German 10 year bunds. There are no guarantees in life but for those with the longer-term horizon these circumstances are one that offers a pretty compelling investment case for the big multinationals.
Today’s data from Europe comes ahead of the impact that the sanctions on Russia could impact the European economy further. Whilst we are in danger of sounding like a broken record, we continue to reiterate the view that those economists or investment managers planning for rate hikes in any developed economy may be waiting a while yet.