Strong gains for European shares as China GDP and German ZEW beats forecasts

European stock markets enjoyed a strong early start to trading after Chinese GDP slowed less sharply than expected and German ZEW massively beat forecasts, triggering a rise in risk appetite from investors. However, the longevity of today’s rally may be dictated by the success of the US earnings season, which picks up speed today with the release of Citigroup’s Q4 results.

What we have seen is commodity prices lifted by the better than expected reading of Chinese GDP, and this lift has given a correlated support to heavyweight mining and oil shares this morning.

Chinese GDP lifts stocks

Chinese GDP slowed from 9.1% to 8.9% in Q4, which proved better than many had feared, which was a fall to 8.7%. There remain significant concerns over slowing Chinese growth and the fact that GDP has not slowed quite as quickly as most had expected helps to cool those fears.

What remains less transparent is whether this data will influence Chinese monetary policy, which has changed tact of late to help support slowing growth. The gains we are seeing across the board for resource stocks may be scuppered should this data change the pace at which the Chinese authorities attempt to stimulate growth, though that potential appears far from the mark at present.

The FTSE 350 mining sector saw gains of 2.3% as a result, and these gains were closely followed by a similar charge higher in financial stocks, with the FTSE 350 banking sector also gaining 2% as investor appetite for risk increases.

ZEW see’s huge jump

The German ZEW figures smashed expectations, coming in at -21.6 which is a marked improvement from -53.8 last time around, especially when most analysts had expected a smaller rise to -50. Current conditions also beat forecasts, with the measure rising surprisingly to 28.4 from 26.8, when a fall to 24 had been expected. This is a huge reading, make no mistake, and whilst its important not to get too far ahead of ourselves, it’s hard not to pay attention to the fact that this is the biggest jump in the ZEW for January ever. More evidence of consistent improvement in this reading will be needed to have a long term impact on investor sentiment.

The euro rallied over 1% against the dollar on the back of the ZEW figure, giving the single currency some short term relief from its recent 16 month low woes, whilst a smooth Spanish T-bill auction also brightened the euro’s near term prospects as bargain hunting cemented euro support. The longevity of today’s euro gains however is less transparent with ongoing deadlock in Athens between Greece and private bondholders amidst the rising prospect of a default.

US earnings season could be a welcome blindside

We are now getting into the main calendar for major US companies reporting, with Citigroup set to announce before the US markets open and this could influence strongly how financial stocks trade into the afternoon session. Over the next two days, we also have major US firms such as Goldman Sachs, Google, Intel and Morgan Stanley reporting. The US earnings season could help to provide a welcome blindside for investors from the sovereign debt crisis and the deadlock amongst private bond holders and Greece over bond write downs, and if we get a strong earnings season, this could give stocks further support.