European markets are trading flat as traders are focused on the week which is full with action. If you ever wanted to trade high volatility environment, this week will present many opportunities. In terms of events, we have three big events scheduled during this week. Firstly, The ECB meeting is highly anticipated to end with more stimulus. Secondly, we have the OPEC meeting on Friday and the headline inflation has consistently been a problem for central banks around the globe. If the committee decides to cut its oil production, it will change a number of fundamentals in the market. Finally, we also have the US non farm payroll data due on coming Friday, which will make the bed for the upcoming Fed meeting during which they could be lifting the interest rate for the first time in nearly 10 years.
There are so many questions which investors are facing when it comes to these events. Firstly, let’s drill down into the ECB meeting and see where we stand on this. There is no doubt that credit volumes in the Eurozone look very different since the ECB pulled the button on its stimulus package at the start of this year. The M3 money supply tells us that the index is standing at it highest level in a long time. The reading of 5.1% is highly encouraged as compared to previous reading, which was at 4.5% in October. The second most influencing signal that the ECB’s stimulus package has worked is in the arena of interest rates charged by banks for lending to small business. These rates are constantly moving lower which is a good sign for the availability of credit.
Thirdly, it is about the comments by the president of the European Central Bank and how he communicates his message to the market. Draghi has a PhD in this arena. A few weeks ago, he was looking desperate to add more stimulus, however, during his recent comments have started to show some sign of uncertainty or perhaps there are doubts if he will be as aggressive as many thoughts. Nonetheless, the economic confidence in the Eurozone has improved massively and most of this increase was mainly on the back of new stimulus. The index is at 106.1. However, inflation is still the major pillar of concern for the ECB and they need to continue their work on the agenda. Although unemployment is still high in the Eurozone, but it is sliding lower. The wage growth gathers much of the attention and there are two ways of achieving this: either firms cut their profits and pay higher wages or the competition in the market becomes more intense. Currently, we do not see any strong signs of either of these two and hence inflation will remain their concern.
Moving on, the US federal reserve bank is highly concerned about the strength in the dollar. The Strong dollar is not such a good news for the US firms and for the S&P 500 companies, it is a constant headwind. The monetary policy divergence is driving this phenomena, however, the Fed will not allow this to continue. So far the concerns are when the fed will feel confident in raising the rates, but soon this is going to change and the focus will be how aggressive they will be in increasing the interest rate. Under the Alan Greenspan time, the former chairman of the Fed committee, the norm was to increase the interest rate by 0.20% and for some strange reasons, traders are expecting the same thing this time around as well.
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