Stocks Continue to Rally as Sentiment is Lifted by German Deal

European stock markets are moving higher. EUR and pound may have weakened against the dollar, but news that German Chancellor Merkel reached a deal with the Social Democrats on coalition talks has lifted sentiment and helped Eurozone markets in particular to shrug off the prospect of reduced ECB support going forward. Italian stock markets outperformed in tandem with bond markets after this week’s auctions went without a hitch. U.S. stock futures are also moving higher and sentiment is improving again, with the pick up in yields at least lifting the appeal of financials. Asian markets were mixed with the Nikkei underperforming as the Yen weakened against the dollar and closing with a loss of -0.24%. The Hang Seng meanwhile outperformed and gained nearly 1% as it extended its winning streak with property and energy stocks leading the way. Stock on the mainland also closed higher.

Crude oil prices are in a corrective mode today, with front-month WTI futures down 0.6% at $63.41, extending the retreat from yesterday’s 37-month high at $64.75. A low was posted at $63.27, which breached yesterday’s low at $63.45. The market has been looking ripe for a correction for some time, with speculative long positions having been at record highs.

Breakthrough in German coalition talks.

Chancellor Merkel managed to successfully negotiate exploratory talks with the Social Democrats and SPD head Schulz is now backing formal coalition negotiations, although this is still subject to approval by party members, which now seem the last remaining hurdle to a rerun of the grand coalition. Markets are celebrating the deal already and while this is clearly not a love match, but a marriage of convenience, it is hoped that it will finally get things moving again, especially with regard to reforms in Germany and at EU level.

French and Spanish HICP revised down with final readings. The French number was revised down to 1.2% year over year from 1.3 year over year, the Spanish reading also to 1.2% year over year from 1.3% year over year and the combined revisions suggest the risk of a similar change in the final overall Eurozone reading, due next week. Still, the dip in headline rates at the end of last year was mainly driven by base effects and with oil prices having picked up since then, even a downward revision to the Eurozone HICP rate won’t prevent the ECB from starting to tweak its forward guidance.