European futures are trading lower and following the sell off on Wall Street as oil prices continue stay under pressure. The Dow Jones posted its biggest decline since October as investors are worried that there is no floor insight for the crushing oil prices. Although, hedge funds are increasing their long bets and taking the contrary side of the trade, a trade which professionals love to trade, but it is incredibly difficult for smart moment to pick the exact bottom and perhaps scaling into your position is the best strategy to play this. The supply and demand equation is very much in the centre of this sell off and all eyes are on the central banks around the world which can perhaps boost the demand for oil.
The optimism is at its peaks, when it comes to investors who are convinced that the European Central Bank will trigger the board based quantitative easing program early next year. Traders are expensing that there is a strong possibly that the ECB will announce a clear plan about their future purchase of investments during their next meeting in January. According to reports, the ECB has slowed its asset purchase during the last week and this only represents one thing, that the bank is facing challenges, when it comes to balance sheet. The asset backed securities sales dropped to 233 million euros last week which was much lower as compared to the sale of 368 million euros. Similarly, the purchase of cover bonds also fell from 5.078 billion euros to 3.126 billion euros. Since October, the ECB has spent nearly 21.52 billion euros to buy ABS and covered bonds, now this gives a very clear picture about the task in hand which Mr Draghi has. Clearly, the bank is struggling to increase its balance sheet and perhaps the only way to achieve the size of 2012 balance sheet, is by buying the sovereign and corporate bonds.
The question which many are asking is does the country’s credit rating really matter when the European Central Bank is so desperate to buy the sovereign bonds? This is the reason that despite a rating cut by the S&P 500, Italian yields are still dropping. But what we really need at the same time is that EU finance minister should address the extreme budget situation in the euro region. We have France on one side which has a massive budget deficit and on the other hand we have Germany which has a huge budget surplus. Berlin is very stubborn when it comes to spending on their infrastructure and France is spending the money which it does not have. The infrastructure of Germany clearly need more investment but Angela Merkel is determined to produce the zero budget deficit for 2015. Although there is massive pressure from the ECB on Germany to increase their spending so that some growth can be ignited in the engine of the eurozone, but so far there are no sings for this. Today is the final day of EU finance minister’s meeting on budget and investors will look very closely how they deal with the situation of the countries who breaking the budget surplus/ deficit rules and if there are any fines for them.
The sell off for the European markets could also become worse today, as it is not only Europe which is their focus, but also the upcoming meeting of the Federal Reserve bank whose members are becoming more hawkish every day. The fear of an increase in the interest by the Fed especially when the market conditions are not ready is the biggest fear for any investor. We have seen in the past that the Fed has increased the interest rate previously by being overly enthusiastically increased and then took a U turn when the economy started collapsing and the print of such event is the main concern for many traders.
Tesco has issued profit warning once again this morning, no surprise there when the company is facing falling sales and higher cost. If this is a short term pain for the company, there are questions over that because this short term pain is making huge dents on balance sheet and for the company’s reputation. The company really need to to cash in on the Christmas season which their competitor is certainly do, such as Sainsbury. However, there are some signs of good decisions, and the company has taken full advantage of Black Friday and cyber Monday. One thing which Tesco really needs to do is to find their identity and decide if they want to compete with luxury market or the budget market and then perhaps reduce their range accordingly. Clearly being a budget market in the past has worked well for them and they need to execute this strategy more.
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.