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The ECB to announce its monetary policy amid growing tensions within the Eurozone - EMEA brief 25 Oct

DanielaIG

  • The European Central Bank is announcing its monetary policy today, with expectations that Mario Draghi will confirm that the ECB stands by its plan to end its quantitative easing program by the end of the year.
  • The euro plunges on Wednesday as concerns over the Eurozone growth continue.
  • Italian government bonds remain at year-highs as the EU has rejected the country's deficit plan. Yields are expected to remain high over the next few weeks as the Italian government says that the budget plan is designed for Italy and not Brussels, suggesting future disagreements between the two.
  • The Canadian dollar gained on Wednesday after the Bank of Canada increased key interest rates by 25 basis points to 1.75%, keeping to expectations.
  • The S&P500 goes into negative territory for the year as it ended 3.1% lower at 2656.10, down 0.65% year to date, and the Nasdaq had its worst one-day drop in 7 years as it fell 4.4% at 7108.4.
  • The Dow Jones has erased all of its gains for 2018 as it dropped 600 points on Wednesday's trading session
  • Markets in Asia fell overnight as they follow the US major stock indices sell-offs.
  • Oil prices have also suffered from the global stock market slumps as prices have fallen by 1% due to selloff pressure.

Asian overnight: Asian markets followed their US counterparts lower overnight, with a massive 3% decline in Japanese stocks closely followed by their Australian counterpart (-2.8%). The tech-focus continued into Asian markets, after the Nasdaq had its worst day in seven-years. Oil prices slide sharply overnight too, after the Saudi Arabians raised production to 11-million bpd. Could we see the Saudi Arabians begin to drive down oil prices as a gesture to Donald Trump amid the current Saudi crisis in Turkey?

UK, US and Europe:  The European Government announced earlier this year that it was planning on phasing out of its quantitative easing policy, a crisis-era stimulus with a plan to produce stable inflation and solid growth, signalling that gradual increases in interest rates were to come. But as economic events of the past few weeks have unfolded, the ECBs expected economic health of the Eurozone may not have held up, as there have been signs of weakening growth in some of the countries in the Eurozone and inflation levels have remained below the ECB’s 2% target. 

In the recent months, the risk of external shocks has risen, led mainly by continuing trade tensions between the US and China, the high prices of oil due to geopolitical risks, and the prospect of a hard Brexit outcome. Adding to that, damage from inside the Eurozone has also led to hurting the sentiment surrounding the Eurozone's ability to grow. The ongoing disagreements between the Italian government and the ECB regarding budget deficit are a reminder that the European Commission's stimulus to overcome the sovereign debt crisis has not removed the problem of economic divergence between economies of the single currency. This could pressure the ECB to take a more cautious stance on monetary policy compared to the plans it had set previously this year. That said, there are beliefs that the ECB is set to reduce quantitative easing and the concerns over Italy and Brexit are not enough to alter the ECB's message to the markets.

As the Euro is starting to see the effects of the tensions within the Eurozone, the US Dollar is managing to regain some consumer confidence as it is seen as a safe haven amid the Italian and Brexit uncertainties. The Canadian Dollar, on the other hand, continues to rise as consumer confidence is backed by the Bank of Canada's decision to increase interest rates as expected, which boosts the perception of a strong economy.

Looking ahead, the day is likely to be dominated by the latest rate decision from the ECB, with Draghi and co expected to keep rates unchanged. With fears remaining over how the current standoff between the EU and Italy will resolve, markets will be expecting a cautious approach from the bank. Markets will also be looking out for the German IFO business climate figure. In the US session, the release of core durable goods and the latest trade balance figures will provide some volatility for the greenback. However, many of the US traders will instead look towards the release of earnings data from the likes of Amazon and General Electric as a core driver of sentiment.

South Africa: Precious metal prices have gained overnight on some safe haven demand. Base metals trade slightly lower this morning. The rand has weakened following yesterdays Mid-Term Budget speech, underperforming its emerging market currency peers. Tencent is down 2.8% in Asia suggestive of a weak start for major holding company Naspers. BHP Billiton is down 4% in Australia suggestive of a negative start for local resource counters.

Economic calendar - key events and forecast (times in BST)

25oct.PNG

Source: Daily FX Economic Calendar

9am – German IFO (October): business climate index to fall to 103.6 from 103.7. Market to watch: EUR crosses
12.45pm – ECB rate decision (press conference @ 1.30pm): no change in policy expected. Market to watch: EUR crosses
1.30pm – US durable goods orders (September): forecast to fall 2.3% MoM overall, and rise 0.3% MoM excluding transportation orders. Markets to watch: US indices, USD crosses
3pm – US pending home sales (September): sales to fall 1.4% MoM. Market to watch: USD crosses

Corporate News, Upgrades and Downgrades

  • Lloyds saw a fall of 0.5% in underlying pre-tax profit for Q3, to £2.07 billion. Net income was up 2% to £13.4 billion.
  • BT has appointed Philip Jansen from Worldpay as CEO, taking over on 1 February 2019.
  • WPP suffered a 0.8% fall in revenue for Q3, to £3.758 billion, while nine-month reported revenue was down 1.6% to £11.25 billion.
  • Steinhoff International The Company announced on 5 October 2018 (the “5 October Announcement”) that its subsidiary Mattress Firm, Inc. (together with its U.S. subsidiaries, “Mattress Firm”) was taking steps to implement a pre-packaged plan of reorganization through the voluntary filing of cases under Chapter 11 of the US Bankruptcy Code (the “Mattress Firm Filing”). In conjunction with the Mattress Firm Filing, Mattress Firm also secured certain financing arrangements that come into effect upon completion of the implementation of the plan of reorganization and Mattress Firm’s exit from the Chapter 11 proceedings that are intended to support its business going forward.

Air Liquide upgraded to add at AlphaValue
Segro upgraded to add at AlphaValue
Anglo American upgraded to buy at SocGen
Rolls-Royce upgraded to buy at Oddo BHF

Orion downgraded to reduce at Inderes
Rio Tinto downgraded to hold at SocGen
Telia downgraded to underweight at Barclays
Valeo downgraded to neutral at MainFirst

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