European markets pause for breath after Draghi charged rally Eyes on US GDP

European markets paused for breath on Friday after a strong rally in the previous session on confidence boosting rhetoric from Mario Draghi, the ECB President.

The FTSE 100 lost 13 points whilst the DAX fell 0.8% and the CAC traded 0.2% weaker as some investors immediately moved to lock in yesterday’s gains ahead of the weekend break.

Draghi rhetoric questioned by Bundesbank
Yesterday’s rally was aggressive and justified somewhat by the fact that this was perhaps one of the most aggressive statements made by Draghi since he took over the ECB Presidency. Draghi said that the ECB “is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

The key now will be ‘whatever it takes’ attitude; a third LTRO? Giving the European Stability Mechanism (ESM) a banking license? And what will the timing be? It is this debate that has paused yesterday’s rally as investors gauge the likely consequences of Draghi’s rhetoric.

Sentiment from the German Bundesbank this morning to state that ‘buying bonds would set the wrong incentive and that giving the bailout fund a banking license would be fatal and prohibited by European Treaties’ is an example of just how difficult Draghi will find it to turn rhetoric into action. The Bundesbank announcement sent the euro lower against the US dollar as it helped to speed the draining of adrenaline that Draghi’s words gave yesterday.

US GDP eyed for more QE3 clues
Eyes turned immediately to the release of US GDP for the second quarter, where growth is expected to slow to 1.5% from 1.9%. Much of the reading around the GDP will be used by investors to gauge Fed monetary policy. A faster slowdown in growth could see increased optimism that the Fed will be forced to act in terms of definitive QE3, and this may help to curb any reactionary share price falls. A weaker reading could also prove to be a double negative for the US dollar on the faster slowdown of US growth and increased expectations of further easing.

Barclays tops the leaderboard on earnings
Companies continued to reported earnings thick and fast and Barclays delighted shareholders by reporting a stronger than expected set of earnings. The bank, continually under PR fire for the libor manipulation scandal, reported pre tax profits had increased 13% to £4.2bn for the first half of the year, beating forecasts of £3.8bn. That was enough to lift the banks share prices over 4% straight to the top of the FTSE leaderboard.