Friday’s Market Wrap: European shares see monthly gains while Merkel cosies up to unlikely ally

by 18 May, 2018

 

European shares dipped lower in early trading today, but were still on track for more than 4 straight weeks of gains, supported by a rally in energy shares and a weaker euro, which helped investors shrug off worries over political risks in Italy, as the anti-establishment 5 Star Movement and League joined forces as a coalition, looking to reshape the nation and its relationship with the EU.

Unsurprisingly, European oil companies have been consistently outperforming off the back of a continued advance in oil prices, due to the US weighing fresh sanctions on Iran, one of the world’s largest oil exporters. Today, investors will be looking ahead to the latest weekly instalment of drilling activity from Baker Hughes that will provide fresh insights into U.S. oil production and demand. If production is still increasing rapidly, this could cause a slight pullback in the oil rally.

Cosying up to an unlikely ally 

Angela Merkel meets Vladimir Putin for talks in the Black Sea resort city of Sochi today. Their relationship has often been strained, most notably over Moscow’s annexation of Crimea. That push for expansion under Putin is one of the reasons NATO troops began gathering in Eastern Europe in recent years, heightening tensions between the EU and Russia.

However, this time around the pair have a shared issue due to the US pulling out of the Iran nuclear agreement and reinstating sanctions on the country. The move from the US could mean Russian and German companies doing business with Iran may be harshly sanctioned too. As such, it seems likely that today Putin and Merkel will discuss a joint response in case their companies doing business with Iran are hit.

Germany and Russia are also linked (literally) over a controversial pipeline (Nord Stream 2) which carries natural gas from East to West. The US has threatened sanctions on that project too, as they say it could potentially increase Russia’s ‘malign influence’ in Europe.

Trump’s lack of predictability on foreign policy has ironically made Putin seem more reliable and though Trump’s team has implored European leaders to see sense over the Iran issue, US-led sanctions may in fact be pushing EU leaders further away and into the arms of Russia.

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