European equity markets are racing higher as traders rejoice in the closure of the Chinese markets. Previously, dealers have been cautious about bargain hunting after many had their fingers burnt, but with China closed until next week traders are taking advantage while they can.
China has been the single biggest source of uncertainty in the financial markets in the past few weeks, and for the next two trading sessions that uncertainty has been removed. Any buying these days tends to be short-lived, and as China isn’t out of the woods yet it will be a true test of confidence to see how long the gains are held.
Deflation has been the European Central Bank’s watchword for a long time, and now that commodity prices are under pressure we could see the eurozone’s cost of living slip back into negative territory. The eurozone is clinging to minimal levels of inflation but if commodity prices stay weak for a prolonged period it could prompt front-loading of the bond-buying scheme.
We are expecting the Dow Jones to open 70 points higher, at 16,420. Last night’s Beige Book painted a positive picture of the US economy, but it wasn’t good enough to make traders fearful of an interest rate hike next month. The biggest issues facing the US are outside of its control, and the excessive references to China in the Beige Book suggests that the Federal Reserve will be cautious of increasing interest rates, and this is coaxing out the buyers.