The DAX index has started the new week with strong gains. In the Monday session, the DAX is trading at 12,144, up 1.08% on the day. On the release front, there is just one event on the schedule. Eurozone Industrial Production declined 0.6%, missing the estimate of -0.4.%. On Tuesday, Germany releases Preliminary GDP for the first quarter, with an estimate of 0.7%.
It was a tough week for the DAX, which dropped 2.4%. Global stock markets had a rough week, which was dominated by the crisis between North Korea and the US, in which the two countries exchanged sharp warnings, and Pyongyang threatened to attack Guam, a US territory. Tensions between North Korea and the US remain high, but the prevalent sentiment in the markets is that a diplomatic solution will be found to end the crisis. The stock markets are excellent barometers of geopolitical tensions, and the gains in Monday point to a lowering of tensions. Still, Donald Trump and Kim Jon-un are unpredictable leaders, and a move by either side could easily ratchet up hostilities and send stock markets lower.
Eurozone inflation levels remain weak, as the July rate of 1.3% was well off the ECB’s target of 2.0%. Germany’s robust economy is the star of the continent, but it has not been immune to low inflation. Still, there was some positive news on Friday, as Final CPI in July climbed to 0.4%, up from 0.0% a month earlier. This marked a 4-month high. Later in the week, the ECB releases Final CPI, and a weak reading could dampen investor confidence and send the DAX downwards.
Will the ECB shake up the markets at the September policy meeting? The bank has consistently said that will not begin winding down its asset purchases program until inflation rises, but last month, the bank appeared to change its tune. In July, the ECB said it would hold discussions on the quantitative easing (QE) scheme in "the autumn", and analysts are split as to whether that means September or October. Either way, this means that the markets expect to hear an announcement regarding QE. The bank tapered QE earlier in 2017, from EUR 80 billion to 60 billion/mth, and there are calls to reduce this to EUR billion/mth. The ECB is scheduled to terminate the asset purchases program in December, and could start tapering in early 2018. The bloc’s economy is forecast to expand a healthy 2.0% this year, and the eurozone outperformed both the US and the UK in the first half of 2017. The sore point remains inflation, which is stuck at low levels, despite the ECB’s ultra-accommodative monetary policy. Another factor which policymakers must deal with is the ECB’s bloated balance sheet, which stands at more than EUR 2 trillion.
