Financial markets recovered in European morning as France and Germany avoided economic contraction in 2Q12. Oil prices also climbed higher as Iran-Israel tensions escalate, in addition to output shortage in the North Sea. Increasing signs of Israel's military intervention in Iran have sent support to oil prices. Gold also edged higher but remained confined with recent narrow range. A breakthrough would need to be accompanied by additional easing from the ECB and/or the Fed.
As tensions between Iran and Israel intensified, the Haaretz daily reported that Israel is considering a strike against Iran over its nuclear program. While it's reported that Israel has upgraded its missile defense system, Prime Minister Netanyahu said that "all threats directed at the Israeli home front are dwarfed by another threat, different in its magnitude and substance, and so I have repeated and shall repeat: Iran must not be allowed to obtain nuclear weapons". While it's unlikely for Israel to intervene militarily on its own and the US would probably not support an attack as election approaches, escalation of geopolitical tensions should add to worries over supply disruption in the Middle East.
On the dataflow, the Eurozoe's GDP contracted -0.2% q/q in 2Q10, down from the flat reading in the prior quarter. Peripheral countries were key contributors to economic weakness with Portugal's GDP contracted -1.2% and Spain's dropped -0.4%. In the second half of the year, risk of the outlook remained to the downside. Yet, sentiment was lifted after the set of data, mainly because core economies such as France and Germany avoided recession. French GDP came in better than expected with flat reading, compared with consensus of a drop of -0.2%. Germany's growth, however, eased to +0.3% from +0.5% in 1Q12.
UK's inflation unexpectedly rebounded in July. Headline CPI rose to +2.6% y/y in July, up from +2.4% a month ago. We worried that the pickup in inflation would prevent the BOE to from adding further stimulus despite weak economy. In the US, retail sales probably gained +0.3% m/m in July, following a -0.5% drop a month ago. Excluding auto, retail sales probably added +0.3%, following a -0.4% slip in June.