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In the markets: What to watch this week

Global markets shrugged off global losses after the European Central Bank (ECB) eased aggressively, but could not meet investor expectations of future stimulus suggesting the ECB is running out of room with its policy measures.

ECB President Mario Draghi unleashed a bold stimulus package on Thursday as he cut the deposit interest rate by 10 basis points to -0.4%, lowered its main refinancing rate to 0 from 0.05% and shaved the marginal lending rate – used by banks to borrow from the ECB overnight – to 0.25% from 0.3%.

Additional to the interest rate decreases, Draghi raised the ECB’s monthly asset purchases to €80bn from €60bn.

The Bank will start buying corporate debt and offer to pay banks for lending to companies in an attempt to kick-start growth and stave off deflation in the ailing euro area.

Markets initially cheered “Super Mario’s” bazooka launch but 45 minutes later, at the press conference, investors quickly came to realise that it was a misfire as Mario announced that there would be no further cuts to interest rates.

Markets reversed course as Mario continued by slashing growth forecasts for years to come and pushed out the inflation target date.

“Rates will stay low, very low, for a long period of time and well past the horizon of our purchases,” Draghi told the news conference. “From today’s perspective, and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further.”

For a central banker who has had an excellent record of communicating well, the market was certainly disappointed – the JSE closed flat.

US

On Wednesday this week the US Federal Reserve Bank is expected to announce its interest rate decision and follow up with a Federal Open Market Committee (FOMC) press conference, which will be followed by the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) meeting on Thursday.

Fed policymakers are expected to keep rates unchanged, despite the encouraging jobs report for February, as recent US manufacturing data clouded the outlook.

A Reuters poll suggested that a hike by end-June and once more before year-end was likely as concerns of global growth ebbed.

FOMC members do not seem to be as united on policy matters as the debate continues regarding inflation overheating and low growth.

We at Capilis forecast that as long as the labour market data remains on track and signs of somewhat higher inflation emerge, the FOMC will raise rates unless the cycle of market volatility experiences another major sell-off. Inflation data from the US is due to be released prior to the interest rate decision.

The effect of tighter monetary policy, by the Fed increasing rates, could impact negatively on global equity markets including the JSE. Janet Yellen, Chair of the FOMC, must undertake the careful balancing act of increasing interest rates without stocking fears with investors that the global economy is too fragile for a hike.

SA

The SARB has a similar tight-rope to cross on Thursday.

Despite a likely downward revision of growth and inflation, the statement’s rhetoric should lean towards a moderately hawkish outlook while keeping key interest rates on hold.

Inflation rate and retail sales data will be released a day prior to the MPC decision revealing information for analysis. Should international markets maintain their recently low volatility, we can expect moderate gains in equities and the rand.

China and Japan

Potential risks to the stable flow of markets this week are the weekend’s results of industrial production from China and trade balance data from Japan.

Also, should the Bank of Japan (BOJ) Monetary Policy Statement and press conference or Australian’s Monetary Policy Meeting Minutes relate any direct weakness to China, there is a possibility of increased volatility.

China took advantage of its stronger yuan to build strategic oil reserves, lifting the crude prices.

Oil prices have seemingly been detached from fundamentals as the price rallies while a glut persists without a concrete supply side agreement. Oil, as a bellwether for risk, poses potential risks to a stock market sell-off and rand depreciation, and is something to keep a close eye on.

England

Last, but not least, of the central banks’ announcements this week is the Bank of England “Super Thursday” as it releases the MPC’s Official Bank Rate Votes, Asset Purchase Facility Votes and Monetary Policy Committee Meeting Minutes.

Albeit, the recent focus has been on Brexit fears as the June vote looms. The sterling pound has lost over roughly 6% to the euro since beginning January.

Other market influences this week:

Tuesday

• US Retail Sales and Producer Price Index (PPI)

Wednesday

• Great Britain Employment and Annual Budget

• US Crude Oil Inventories

Thursday

• EU Final CPI

• US Employment, Current Account and Natural Gas Storage

Friday

• German PPI

Take note of daylight saving time shift.

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.

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