European markets are set to start where they left yesterday and they are trading lower despite the fact that we had a slightly better number for the Chinese HSBC manufacturing data. Perhaps, traders are focusing more on the oil rout and on the global sell off and using this occasion to book their profit and selling those equities which had a tremendous run last year. You cannot blame them, it is difficult to convince the investors when you have only talk from the president of the ECB to do “whatever it takes” and in reality he is still struggling to come up with full blown QE.
Nevertheless, there is one thing in common across all global market which is a panic sell off as the price of oil dropped into the 40 handle. Although, you would expect that lower oil price should be a good news for the stock market, but in fact it is not, because the fact is that lower oil price could trigger a completely new affair, which we have not experienced in some very long time. Hence, the energy and construction stock such as BP (NYSE:BP), Exxon (NYSE:XOM) and Caterpillar (NYSE:CAT) are under heavy selling pressure since the rout in oil prices have started. The reason is simple, if the oil price is below the break even price, this will put more burden on the balance sheet of energy companies who have billions of debt on their books and at the same time it also increases the stress on the lenders- a perfect scenario for debt default.
However, this is only one part of the equation when it comes to the global sell off. The main concern is about the euro and if the currency is irreversible? So far, traders had a firm believe that the eurozone members will do whatever it takes to keep the currency bloc together, but the recent rumours out of Germany have changed the odds of that, as some investors have started to price in that perhaps it is time to cut the losses and let those countries go which are dragging the currency down. But, only if it was that simple, the fact is that Greek economy is the size of Apple’s market share, so if the problem could be solved by letting Greece go, this options could have been selected long time ago. The major concern is that this event could fuel other anti austerity parties in much bigger economies such as Spain and Italy, which are of the same mind set that austerity is a German way of resolving the affairs and this will not solve the problems.
In addition, we have the president of the ECB bank who is perhaps not as free as he talks and is in a constant battle with Germany when it comes to the topic of massive and full scale quantitative easing program. The German CPI data released yesterday clearly had the effects of falling oil prices and the eurozone CPI data, which is due tomorrow, will not be able to escape the impact of this either. There are even questions if Mario Draghi is allowed to trigger the button of full blown QE, the sharp sell off in the oil prices will still be a major hurdle when it comes to tackling the inflation part of the equation.
On the other hand, the decline in the euro could also be blamed due to the divergence in polices between the European Central Bank and the Federal Reserve bank. The kind dollar is not only strong against the euro but also against the basket of major currencies. The sad fact is that this trend could very well continue for rest of the year unless the cracks in the U.S. economic data do become more visible which may push the Federal Reserve bank to change their policy once again.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. Responsibility for trade decisions is solely with the reader.
by Naeem Aslam