31st August 2014 – The rise was attributed to the strong U.S. data and German bond yields rising up from their record lows, amid expectations that the European Central Bank (ECB) would ease monetary policy next week, fading away.
The S&P 500 index; which is the U.S. benchmark, ended on Friday above the 2,000 milestone for the third time, setting a new closing high. The rise in the S&P for August is the best since February.
The euro-zone inflation fell down to its five-year low, which initially caused European shares to decline. However, the improvement of the U.S. economy caused the European shares to bounce back again. According to analysts, the decline in the euro-zone inflation was unlikely to lead ECB in to taking any action any time soon.
The U.S consumer spending also rose to a seven-year high in August, after witnessing a decline in July for the first time in six months; suggesting that the decline was most likely temporary. There was also a rapid rise in the factory activity in the Midwest, emphasizing the U.S. economy’s relatively strong fundamentals.
According to Andre Bakhos, the managing director of Janlyn Capital LLC “Economic numbers have been positive for the most part, people are drawing comfort from these numbers, using them as a justification for optimism.”
Wall Street and European stocks closed higher, with .MIWD00000PUS (MSCI’s gauge of worldwide stock performance) rising 1.9 percent in August, its best monthly performance since February. However, Wall Street outperformed European stocks by closing higher in August. For instance, the Nasdaq Composite .IXIC rose by 4.8 percent, the S&P 500 .SPX gained 3.8 percent and the Dow Jones industrial average .DJI climbed 3.2 percent.
The index of top European shares; the FTSEurofirst 300 .FTEU3 index closed up 0.33 percent at 1,373.82 points. The Euro STOXX 50 .STOXX50E rose 1.8 percent in August, its biggest monthly gain since February.
The start of the week witnessed a sharp decline in the European bond yields across the euro zone after Mario Draghi (President of ECB) highlighted a significant drop in inflation expectations. His comments also raised expectations that the ECB would deploy quantitative easing (QE), which is large-scale purchase of assets. These expectations helped in boosting enthusiasm for stocks, both in the euro zone and the U.S. and also weakened the Euro.
However, according to Wouter Sturkenboom, investment strategist at Russell Investments “What people realize is that for the ECB to engage in public-sector QE … the ECB has to see the whites of the eyes of deflation.”
After the report on euro zone inflation, the Euro rose to $1.3195. However it later retreated and fell down to $1.3139.
The benchmark 10-year U.S. Treasury notes US10YT=RR seesawed, falling 2/32 in price to push its yield up 2.3431 percent.
The benchmark for euro zone borrowing costs; the German 10-year Bund yields DE10YT=TWEB, rose half a basis point to 0.891 percent, having hit a record low of 0.86 percent on Thursday.
With the Midwest manufacturing data pointing to a stronger demand, the U.S. crude oil rose for a fourth straight day.