Markets solid amid European recovery hopes

LONDON (AP) — Hopes over the European economy coupled with a bounce-back in Japan’s Nikkei stock index to shore up markets Tuesday, despite slightly worse-than-expected U.S. retail sales figures.

The Nikkei’s 2.6 percent advance buoyed stock markets across Asia and into the European session. European stocks received a further boost after figures showed industrial production in the eurozone rose by 0.7 percent in June from the month before, meaning output rose by 1.2 percent in the second quarter.

Coupled with a better-than-expected ZEW survey into German investor confidence in August, hopes are high that the eurozone will be confirmed to have emerged from recession when second-quarter figures are published on Wednesday. The eurozone has been in recession since the latter part of 2011 and the consensus in the markets is that the bloc’s economy grew by a quarterly rate of 0.2 percent in the April-June period.

Ben May, European economist at Capital Economics, said the figures “provide further signs that the eurozone has emerged from recession.”

That’s a relief for investors as it provides an indication that the worst of Europe’s debt crisis has passed.

In stock markets, Germany’s DAX was up 0.7 percent at 8,415 while the CAC-40 in France rose 0.3 percent to 4,084. The FTSE 100 index of leading British shares was 0.4 percent higher at 6,602.

Wall Street was poised for a fairly solid opening, with Dow futures and the broader S&P 500 futures up 0.2 percent.

Expectations over the U.S. opening were dented slightly by the news that retail sales during July only rose by 0.2 percent from the previous month. That was just shy of expectations for a 0.4 percent rise.

Retail sales are particularly important as they account for around 70 percent of the U.S. economy. As such, the figures could have an impact on expectations of when the Fed will start to reduce its monetary stimulus. Most economists think that so-called tapering will start as soon as next month.

Despite the slightly softer report, most economists thought retail sales were solid enough to not alter the Fed’s plans much.

“If the economy gathers a bit more momentum as the Fed is projecting, it may begin paring back its bond purchases as soon as next month, effectively trimming the degree of stimulus it is providing to the economy,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors.

“While such a move could lead to volatility across the capital markets, the passing of the baton from the Fed’s stimulus to self-sustaining growth is a necessary step for the long-term health of the economy,” Baird added.

In the currency markets, the dollar got a little lift from the figures as some traders speculated that it may delay the Fed’s tapering. The euro was down 0.4 percent at $1.3260 while the dollar was 1 percent higher at 98.07 yen.

Earlier, the yen’s weakness had helped Japan’s Nikkei be the standout performer, a day after disappointing second-quarter Japanese economic growth figures weighed on sentiment. The Tokyo benchmark closed 2.6 percent higher at 13,867 amid hopes that slower growth may prompt the country’s policymakers to take further action to shore up the economy. The Bank of Japan has already embarked on a big monetary stimulus program to get inflation up and get Japan out of its two-decade stagnation. Those hopes piled the pressure on the recently strengthening yen and that helped shore up Japanese stocks, too.

On Tuesday, there was also speculation that the government may cut corporation tax alongside a planned increase in consumption tax.

Alpari market analyst Craig Erlam said the increase in consumption tax “doesn’t appear to be too major a concern to investors as long as it’s accompanied by a cut in corporation tax, which could in theory encourage hiring, wage increases and investment.”

Elsewhere in Asia, Hong Kong’s Hang Seng rose 1.2 percent to close at 22,541.43 while South Korea’s Kospi advanced 1.5 percent to 1,913.03. Benchmarks in Taiwan, Singapore, mainland China, Indonesia and the Philippines also rose.

Oil prices tracked equities higher, with the benchmark New York rate 75 cents at $106.91 a barrel.

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