Riskier Assets Surge as Tax Plan Moves Forward

European stock markets are in rally mode, following the bullish lead on Wall Street on Friday and markets across Asia. Amid the national indexes, the FTSE 100 is underperforming with a 0.5% gain, reversing Friday’s outperformance with the pound managing to rebound some of the losses it saw late last week. German’s DAX and France’s CAC are among the outperformers, with both showing gains of more than 1%. Investors are still reacting to last week’s less hawkish than expected guidance from the Fed, ECB and BoE, while there are widespread expectations for Republicans to push through its corporate-friendly tax overhaul as soon as Wednesday, with the House due to vote tomorrow and the Senate on Wednesday. Also in the mix has been stronger-than-expected export data out of Japan, which rose 16.2% year over year, coupled with a key quarterly business survey in Japan finding that there remains a strong consensus for benign inflationary conditions to remain.

Japan’s Tankan survey on business inflation expectations showed a continued prognosis of benign price pressures, which offset, at least from a BoJ policy-implications perspective, a forecast-beating 16.2% year over year surge in Japanese exports, which is the latest sign that the Japanese economy is getting back on track under the “Abenomics” policy regime, coupled with robust global growth.

Final European Inflation Grew as Expected

Final Eurozone November HICP inflation was confirmed at 1.5% year over year, as had been widely anticipated, lifting from 1.4% year over year in the previous month, but still well off the ECB’s objective for price stability. The breakdown confirmed that the uptick was entirely due to a renewed acceleration in energy price inflation, fitting into the dovish-leaning narrative of ECB President Draghi. Draghi has been continuing to stress that overall wage growth remains unsatisfactory, too, despite improvements on the labor market. The Bundesbank, in contrast, has been warning about the risk of significant wage increases, at least in Germany, amid signs of growing capacity constraints in the manufacturing sector, and there have been more and more ECB council members arguing that come September next year there won’t be the need for further QE, even if Draghi still shies away from committing to a QE end date.

Political events were relatively positive in Europe last week. The EU and U.K. finally found an agreement that allows Brexit talks to move to the second stage, i.e. talks on trade and transition and Germany’s SPD has agreed to exploratory talks on a renewed cooperation with Chancellor Merkel. The elections in Catalonia on December 21 provide a last focus on the political arena this week, especially as polls suggest a head to head race between the parties in favor and those against independence from Spain. And while on all other fronts nothing else is likely to happen this year, they provide plenty of risk factors for 2018 especially as the election in Italy where anti-EU parties could shake up the landscape, are also coming into focus.