Market Commentary: Investors remain cautious ahead of ECB meeting

The culmination of recent market events following a correction in both credit and equity markets over the summer months and then again in October reaches its (potential) climax this Thursday as the market eagerly awaits ECB the tone of President Mario Draghi in its rate setting meeting.

Following last Friday’s announcement by the Bank of Japan that it would continue to pump up money in the Japanese economy (up to a quarter trillion dollars per year), the ECB is clearly under pressure to perform, and put its money where its mouth is and announce a fresh bout of asset purchases to stimulate the eurozone economy and boost economic activity in the region.

Meanwhile, a week before its scheduled meeting, the ECB published an update on its Covered Bond Purchase Programme, with the total amount of covered bond purchases now standing at €4.8bn after two weeks.

In stark contrast, last week FOMC meeting was a clear sign that the US is ahead of the curve in terms of economic recovery and is now seeking to focus on seeing that much-need uptick in inflationary numbers, now that economic slack seems to be under control.

Despite last week’s announcement, demand for US treasuries failed to abate as investors bid in auctions is at its highest rate. While the Fed has been the biggest source of demand since the financial crisis broke out way back in 2007, the willingness of foreign central banks, insurers and pension funds to stock up on US treasuries has enabled U.S. borrowing costs to remain low.

This week is expected to be the busiest week of earnings season, as by the end of this week, at least two thirds of Europe’s largest companies would have reported earnings.

Meanwhile, on the data front, yesterday we saw the majority of Eurozone PMIs coming in line with expectations, as did except for the solitary disappointing Italian print, whilst US ISM manufacturing surprised to the upside.

On a similar note, business activity in China during the month of October revealed several weaknesses however with signs of strength in distinct parts of the world’s second-largest economy.

The headline figure for the October HSBC final manufacturing PMI moved higher compared with September, though its sub-indexes largely revealed slower growth.

To this effect, market analysts highlight the need for more government stimulus, including easier monetary policies, tax breaks and infrastructure investment, in an attempt to support growth, which could well fall short of the government’s target of 7.5% growth for 2014.

Going back to data releases this week, the data climax is expected to be reached on Thursday, with rate setting meetings by both the ECB and BoE, whilst we’ve also got unemployment and Non-Farm payrolls to contend with in the US, followed by key speeches on Friday by Fed Chairman Yellen and her colleague Tarullo.

In Latin America, reports have revealed that Brazil economists raised their 2015 benchmark rate forecast after the central bank last week boosted rates for the first time since April.

Analysts raised their estimate for the 2015 year-end 12% from 11.50%, according a central bank survey of about 100 analysts published today. The analysts also lowered their estimate for economic growth this year to 0.24% from 0.27% the previous week as policy makers unexpectedly raised the key interest rate last week in an effort to curb inflation still hovering above the government-set target.

Recently elected President Dilma Rousseff in her second consecutive stint at the helm is preparing to name a new economic team to revive an economy that slipped into recession in the first half of the year.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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