The European markets continue to slowly and steadily climb higher , with the Euro Stoxx 50 major indicator adding just about 0.8% since the beginning of the week until noon on Wednesday. However, its increase is almost 2.5% if compared with the last local price bottom of August 19.
Frankly speaking, most of the EU stocks could perform even better if it were not for the German market which clearly underperformed today after today's contradictory release of the national business climate gauge regularly measured by the well-known Ifo Institute on a monthly basis. Unfortunately, it showed a moderate slide to 99.4 points in August which formally added more arguments for non-believers.
Of course, the mathematical fact that the Ifo business climate indicator formally dropped for a second straight month is not disputed. Moreover, the figure came below 100.4, which was expected by expert polls. Yet, most of the market seems to be more eager to continue to concentrate on a positive side of the phenomena as the decline is not so large vs the 101.7 points peak in June followed by 100.7 indication in July. The general point here is that even now the last three summer months put together claim to be the best period for the German economy since the very end of 2018, in terms of the Ifo climate index observations, at least.
Taking this important information into account, the decline of the German Xetra Dax 30 index ranged intraday within the 0.2-0.3% area, does not seem to be essential. The overall picture seems to be especially calm and quiet when the market sees that the absolute value of Dax futures is located well above the 15,800 technical landmark, which is in turn less than 1.5% lower than the 16,030.33 high set on August 13. Apparently, all major European indices reserved a potential prospect of rewriting their top highs again, the markets may wait for the nearest favourable moment when proper conditions will coincide.
"Sentiment (is) positive but vulnerable to shifts ahead of the Jackson Hole conference which features Fed (the U.S. Federal Reserve) Chair Powell on Friday," Rob Carnell, a head of Asia research at ING remarked in a note. "Part of the sentiment improvement may lie with recent thoughts that this weekend's conference will not deliver any further insight into the timing of any Fed taper," he added.
Of course, any fresh signs by even one or two Fed governors concerning the hot topic of when tapering may begin – that is, decreasing of the monthly volumes for the buying bonds program - may carry with it new market risks. But, for example, a detailed interview with Dallas Federal Reserve President Robert Kaplan on Fox Business Network's "Mornings with Maria" last Friday gave markets hope for prolonged bond buying after his words created a feeling of uncertainty about the Fed’s position on the subject during the Jackson Hole meeting and also how the central bank may also see the matter at the very end of the Fed's decisive meeting on September 22.
The interview contained some sentences by Mr Kaplan, which indicated he may rethink his previous opinion on tapering and advice that it begin as early as October if the Delta variant threatens to slow the economy. He said the Delta variant has caused him to have an open mind about the path of monetary policy, while calling it “the big imponderable” in the outlook. “It is in all of our interest to slow the spread, and right now we’re in a negative trend... The thing that I am going to be watching very carefully over the next month, before the next [Fed's] meeting, is [whether] it is having a more material impact on slowing demand and slowing GDP growth. I’m going to keep an open mind on that, and if it is having a more negative effect that might cause me to adjust my views somewhat from ones that I’ve stated,” he literally remarked.
That immediately drove the market to more positive sentiment, even despite the fact that Robert Kaplan also said that so far the Delta variant was not having "a material effect" on consumer activity like dining out but "it is having an effect in delaying return to office, it's affecting the ability to hire workers because of fear of infection," and therefore it may later also affect production output.
In conclusion, Robert Kaplan rejected the Fed's Chairman Jerome Powell’s description of rising prices as “transitory", while adding that the Fed has yet to get a grasp on the recent spike in inflation. He forecasted that inflation may subside to a 2.5% annual rate in 2022 only from a red-hot forecast of as much as 3.9% rate for 2021, noting the risks of higher inflation next year remain substantial. “What label do you put on that? I don’t know. I wouldn’t call it transitory. I just want to try to understand it and we don’t understand it yet,” he replied to one of the clarification-seeking questions.
In fact, all these remarks keep the call for an earlier start of tapering on the table, but collectively all Robert Kaplan comments reflect the Fed's possible hidden intentions to be stalling as long as possible. The market still generally hopes the Jackson Hole event may be just one of the links in this chain of uncertainty, but not the last link certainly. The speeches of different members of the Fed's committee may demonstrate quite different positions. Meanwhile, this uncertainty is probably the best food for the stock market's bulls on both sides of the Atlantic, as the Fed's Dollar "printing press" is going to work almost as intensively as it is functioning right now, and until proven otherwise.
The U.S. S&P 500 broad market index still set its new all-time record on those expectations. Travel, energy, financial and retail sectors are among the leaders of the growth, and there is a high probability that the stock exchanges in Europe may mirror that kind of mood soon.
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