By Geoffrey Smith
Investing.com -- Can this rally be trusted?
Europe’s stock markets had time on their hands to consider that question early Friday, as traders were content to stay on the sidelines ahead of the all-important U.S. labor market report for August at 8:30 AM ET (1230 GMT).
By 5 AM, the benchmark Euro Stoxx 600 was largely unchanged at 385.98 but still on course for a weekly gain of nearly 2% after Thursday’s rally. It’s now made good nearly all the losses incurred since President Donald Trump’s fateful tweet at the start of August which triggered a round of tit-for-tat escalations of the trade war.
By the same token, the German DAX was up 0.1%, also at its highest since early August, while the FTSE 100 was unchanged.
Luxury names outperformed on more signs of a potential de-escalation of the protest in Hong Kong, which accounts for a disproportional amount of sales and profit at groups such as Burberry and Gucci owner Kering.
Elsewhere, all was becalmed, with another set of gloomy German industrial production data keeping any optimism firmly in check. With incoming orders to German factories also falling in July, the first “hard” data of the third quarter from Europe’s largest economy have pointed clearly to a second straight quarter of contraction in the summer.
“Since reunification there have been four comparable industrial setbacks of which three ended in a recession,” Allianz economist Katharina Utermoehl said via Twitter. However, she pointed to one key difference with the last recession in 2008/9, which is that the addition of 6 million jobs to the German economy in the last decade has left consumption structurally stronger.
With no turnaround in sight in the euro zone economy (second-quarter GDP growth was confirmed at 0.2% on Friday), much is now resting on the outcome of the European Central Bank’s policy meeting next week.
“Even if (the German data) come too late to be incorporated into next week’s official ECB forecasts, it will be another argument for ECB members in favor of new monetary stimulus,” said Carsten Brzeski.
Most analysts expect the ECB to cut its discount rate by 0.1% or 0.2%, and to adjust the price of its new long-term loans to as to keep short-term interest rates anchored lower. The big open question is whether it will renew its purchases of bonds, given that a vocal minority of central bankers from Germany, Austria and the Netherlands have all voiced resistance to the idea in the last week.