EU Indices fall over 1 on weaker German GDP reading

European indices fell over 1% in early trading as investors reacted to a surprisingly sharper slowdown in second quarter German GDP than expected, escalating fears that the strongest eurozone economy is also being hampered. Investors also eyed an important meeting between French and German leaders Nicolas Sarkozy and Angela Merkel as the King and Queen of Europe come together to discuss greater eurozone governance.

From a sector perspective, it’s the miners, oil and banking firms that are all trading lower and locking in the weaker start to trading for European indices. A stronger US dollar, which has seen the dollar index rally 0.4% in early trade, is hampering commodity prices, with both copper and crude oil falling 1%. This is correlating to a negative start for the key oil and mining firms and encouraging investors to lock in their gains from these two sectors, which were the standout gainers in Monday’s session.

German GDP disappoints
It is the really disappointing German GDP reading that is weighing on European markets today. Second quarter German GDP slowed to 0.1% from a downwardly revised 1.3% in the first quarter, marking a sharp slowdown that quickened more than the market had expected, which was a reading of 0.5%. Whilst the reading emphasises the potential broadness of the global economic slowdown most macro economic data is pointing to, one of the things this also likely does is strengthen the public resolve against further financial support from Germany to its indebted European neighbours but also serves as a reminder that German strength is linked to the broader strength of the wider economic recovery. Investors will now watch for the eurozone GDP reading due out later this morning at 10am London time.

Eyes are now switching to today’s meeting between Angela Merkel and Nicolas Sarkozy as the two leaders meet to discuss eurozone governance and ways to reinstall confidence as the sovereign debt crisis rambles on. With the offices of both leaders maintaining yesterday that the issue of a euro bond was not on the agenda, the focus will instead switch to the method and operations of the EFSF.

UK inflation higher than forecast at 4.4%
Data from the Office of National Statistics showed that UK inflation accelerated to 4.4% in July, higher than the 4.3% forecast, bringing closer to reality the prospect  that inflation could hit the Bank of England’s forecast of 5% later this year. Whilst equity markets saw relatively little change from this, the pound sterling did see a small price rally, with the sterling dollar cross rate rallying from $1.6327 to $1.6353.