Europe
The weekly gains in European stocks stalled on Friday hurt by a drop in German business confidence and the further uncertainty surrounding Greece’s future with Eurozone officials suggesting a parallel currency to be used alongside the euro.
German GDP grew at a lukewarm 0.3% in the first quarter according to latest estimates, landing it an annual growth rate of 1.1%
Business confidence in Germany according to the IFO dropped to 108.5 in May from 108.6 the previous month, but that was higher than the 108.3 forecasted.
Finance Minister Wolfgang Schaeuble was said to mention the option of a Greek parallel currency such as IOUs at a meeting in Riga on Friday, without endorsing the idea. The idea of a parallel currency is not without precedent but the news really just reflects Germany’s willingness to take the game of chicken to the very edge, taking any opportunity to show its not worried about a Grexit. Earlier in the month, Greece officials said Athens is not considering a parallel currency.
The UK’s Prime Minister David Cameron has said it will be a long path to EU reform. Reading between the lines, a “long path” would suggest the in-out referendum won’t be until 2017 and not an immediate concern for financial markets. Two years would give the government enough time to bring about a better deal with Europe. With the EU dealing with Greece, and possibly soon the likes of Portugal, a referendum in 2016 would offer Cameron almost no opportunity to negotiate.
The FTSE 100 finished the week with a flourish, moving solidly through 7,000 supported by M&A talk surrounding Vodafone (LONDON:VOD) and Liberty global as well as broker upgrades for Dixons Carphone (LONDON:DC) and Travis Perkins (LONDON:TPK).
US
Stronger than expected inflation left US markets flat-lining in early trading on Friday, just beneath record highs.
Core CPI for April rose 0.3%, the biggest monthly jump since March 2006 with year-over-year core prices up 1.8%, the most since January 2013.
A speech from Fed Chair Yellen after the close of European markets could provide that much needed clue (missing from FOMC minutes this week) that the Fed will hold off on a hike until the economy picks up again.
For US markets to make the next leg higher, which they appear to be itching to do, language from the Federal Reserve needs to match the weaker economic data. For stock bulls, it’s no good having weak economic data if the Fed is still determined to hike rates.
FX
The US Dollar was strong across the board after narrowly beating expectations on consumer price inflation. The strength of the reaction to what was a very modest reading, can only be explained by a dollar bullish-bias that remains in markets in the context of QE in Europe and Japan and an eventual rate hike from the Fed.
The strength of the US dollar undid all of the gains from strong UK retail sales data for the British pound, sending GBP/USD back to 1.55.
Commodities
The determination of OPEC member countries to ramp up oil production, coupled with a slowdown in the decline in US oil rigs has put a temporary top in oil prices. Each of the rallies in crude oil since the beginning of May has faded at a slightly lower level than the last. Thursday’s rally in Brent crude couldn’t hold $66 per barrel before coming off on Friday, well short of the 2015 high around $69.
Gold, silver and copper finish the week lower thanks to renewed dollar strength.
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