The Coming Week’s Top Market Movers: The Biggest Event of 2014 This Week?
How bullish and bearish forces align for stock indexes, forex and other global markets, both technical and fundamental outlooks, likely top market movers.
— The Big One: The ECB Rate Statement And Press Conference Thursday June 5th, Explanation, Ramifications, Scenarios
— The Monthly US Jobs Reports And Related Leading Indicator Reports
— Other Top Potential Market Movers: Geopolitical, Scheduled, And Developing Ones To Monitor
Coming Week Market Movers: Focus On Fed, ECB Policy Related Events
The events with the most market moving potential, should they offer any surprises, are:
1. The Big One: The ECB rate statement and press conference Thursday June 5th
Arguably this is the most important event of the year thus far, and could potentially be among the year’s most influential, profoundly effecting the Euro-zone, and hence virtually every global asset market, with currencies and bonds most directly impacted.
Markets expect the ECB will announce a new package of policy steps designed to stimulate the EU’s economy and fight off deflation threats by lowering certain key rates, easing credit, and, it is hoped, weaken the EUR and boost European exports. It’s believed that the likely package (see below) and its effects have already been priced into markets, at least the currency credit markets which pay better attention to major central bank moves.
That said, there’s plenty of room for surprises, if not in actual policy steps, then from interpretation of any comments and forward guidance given. The big question is how these comments alter the consensus about the pace and timing of future easing.
If the ECB sounds more dovish than expected, either because the current package is bolder than expected or forward guidance sounds more dovish, you’ll see the reaction fast. Current trends will get a boost- stocks and other risk assets and currencies are likely to rise, as could the USD due to weakening from its prime trading counterpart, the EUR. A European style QE is not expected at this time, but ECB President Draghi has already mentioned that it could come later. Markets will be listening for hints on that.
If the new easing package is in line with expectations, markets may not move much, although the EUR is likely to see a bounce after having sold off for weeks on the easing rumor.
If the easing package is much weaker than expected, then risk assets could sell off and the EUR would likely jump back to the upper end of its 15 week trading range.
Speculation On Scope And Extent Of ECB Easing And Ramifications
The pair’s minimal movement over the past week tells us there was little alter current expectations about the extent and scope of likely ECB easing, which continue to comprise some combination of the following:
- Suspend sterilization of its Securities Markets Program (SMP), assuming Germany has dropped its opposition to at least some degree of pure debt monetization. The ECB is almost certain to do this sooner or later for reasons we wrote about in our January special report: Coming 2014 Explosion: EU Money Supply or EU Itself?
- A lending rate cut: Currently at 75 bps and marks the top of its interest rate corridor. A lower lending rate, under current conditions, might minimize the volatility of overnight rates (EONIA).
- A re-finance rate cut: Currently at 25 bps and below the current policy setting, the ECB provides as much funds at this rate as banks want, limited only by how much acceptable collateral a bank has. The consensus is for a 10-15 bps cut. The ECB also could extend the period for which is it willing to provide unlimited funds. Although EONIA has traded above the refi rate, a lower refi rate might produce a modest reduction in overnight rates.
- A deposit rate cut. It’s currently 0%, and there is speculation that the ECB could set it at -25 bps, which would amount to a tax banks for leaving excess reserves at the ECB. This is the most controversial option because it has some secondary effects and has never been used over such a large currency area. Banks are likely to pass on the negative rates to customers, which would encourage large depositors to move funds elsewhere if they’re large enough to have that option, thus eliminating the added liquidity this option is supposed to provide by encouraging banks to lend. As we’ve noted before, coming ECB stress tests are a strong incentive for banks to retain cash or deploy it in only the most conservative ways, thus defeating the purpose of the negative deposit rate and making its costs outweigh its benefits.
- A fixed-rate offer of cheap central bank funds, often referred to as a longer-term refinancing operation. Under the LTRO, banks could borrow unlimited amounts from the central bank in the form of loans with maturities of a number of years. The exact rate could vary with a given bank’s commitment to lend the funds in specific areas.
The only news of note about ECB thinking was a report on Monday that ECB President Draghi admitted on Monday at a policy meeting in Portugal that if there were “too prolonged” period of inflation below current expectations, then that “would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.”
In other words, no QE is planned for now, but prolonged low inflation could put it on the menu.
Why This Matters: The Key Points
With rates already low, the first two options are unlikely to have much impact.
The fourth option, negative deposit rates, is the most interesting and most likely to have noticeable ramifications, both good and bad.
It’s more radical and with coming bank stress tests may not help increase liquidity, and may even lower it by causing big depositors to move funds elsewhere, or, to prevent that, to banks absorbing that cost and finding other ways of recouping that expense.
The introduction of negative rates could spark a new leg down for the EURUSD for a number of reasons.
- It’s never been tried in such a big currency zone (Denmark had done it briefly years ago) and so the uncertainty alone could bring EUR selling.
- Per a CitiFX note issued last week, European banks may well decide that rather than keeping Euros on deposit with the ECB (beyond the minimum needed), the best option would be to sell the EUR to fund purchases of higher yielding currencies. As for other alternatives:
- Lending to other European banks or (businesses that are not among the very most creditworthy) may not provide enough yield to justify the counterparty risk)
- Lending to non-financial “real economy” firms could be limited anyway by
- lack of demand for new loans from these businesses (the ones the ECB wants to help via easier credit), at least not at rates the banks will want given the risk
- the still growing number of non-performing loans in the EU’s periphery, which keeps banks reluctant to lend there, especially in light of coming stress tests that will punish banks holding these riskier loans
- Yields on short term and low risk commercial and sovereign debt are too low, yet coming bank stress tests will penalize high exposure to the sovereign bonds of the EU periphery, which yield less than ever anyway.
2. The Monthly US Jobs Reports And Related Leading Indicator Reports
These pack less market moving potential than the ECB event simply because given the Fed’s current dovish stance, one jobs report, no matter how good, is unlikely to change Fed policy or market expectations about it. Remember that the ADP non-farms payrolls report, and the jobs component of the ISM non-manufacturing PMI report are seen as key leading indicators of the Friday official non-farms payrolls and unemployment reports’ results.
Nothing in the current flow of US data suggests a result that goes beyond the overall “slow but steady” recovery theme. Remember that last month’s report had a great headline numbers but even those results were undermined by low labor force participation.
Geopolitical Threats Remain In The Background
Ukraine Clashes, Russian Business As Usual
Despite clashes between government and separatist forces, Ukraine held its new elections, and business between Russia and the West continues as usual. For example:
- Although its CEO is subject to sanctions, Russian oil giant Rosneft signed numerous new deals over the past week
- France’s Total and Lukoil signed a joint venture to develop the Bazhenov shale. Talks on the tie-up had earlier been reported by the FT.
- Exxon Mobil’s CEO told shareholders that sanctions against Russian officials weren’t affecting the company’s business in Russia. France has not indicated any changes in its plans to sell Russia warships.
As for the election, if Mr Poroshenko’s first-round victory is confirmed, it delivers someone with whom Russia should be able to do business, and who will likely be sensitive to Russian fears about having a provocatively Western ally on its borders.
He publicly backed February’s protests in Kiev against former president Viktor Yanukovich but, as a businessman who has also served as a government minister, and so was also a part of the very corrupt system the demonstrations sought to overthrow.
He’s been portrayed as a pragmatic figure, whose pro-European stance is balanced by business links with Russia. It’s these apparently conflicting elements in him that may allow him to deal with the country’s Ukrainian-speaking west, Russian-speaking east, and with Russia.
Meanwhile, contrary to Russian claims that “fascists” and “neo-Nazis” have seized power in Kiev, Oleh Tiahnybok, leader of the Svoboda or Freedom party, polled only 1.3 per cent. That was far below the 10.4 per cent his party won in 2012 parliamentary elections, even though Mr Tiahnybok was a leader of the anti-Yanukovich demonstrations.
Dmytro Yarosh, head of Right Sector, the far-right paramilitary group that is a particular bogeyman of Russian media and officials, polled 1.1 per cent, according to exit polls.
China Versus Everyone Else
There were separate reports of provocative incidents between China and at least 3 of its neighbors Japan, Vietnam, and the Philippines.
Top Calendar Events To Watch
Beyond the ECB policy announcement Thursday and US monthly jobs reports Friday, here are the likely market moving events for the EURUSD, either directly or from their influence on the overall risk appetite with which the pair usually moves. See any good economic calendar for further details.
Sunday: China manufacturing (mfg) PMI
EU: German preliminary CPI (which was a deflationary -0.2% last month), to the extent that it might influence speculation about ECB easing. More German deflation will feed hopes that Germany will not oppose stronger easing.
US: ISM mfg PMI, especially its jobs component, which could influence expectations for Friday’s NFP results.
China: Non-mfg PMI, HSBC final mfg PMI
EU: CPI flash estimates
EU: Spain, Italy services PMIs
All: G7 meetings
–ADP non-farms payrolls (NFP) change, which can be influential to the extent it influences speculation about the Friday official BLS NFP results. The ADP has been accurate on direction (beat or miss) but not reliably predictive of magnitude of the change.
–ISM non mfg PMI
All G7 meetings
EU: ECB rate statement, press conference: What we’ve been waiting for since the last meeting – the event with most potential to move the EURUSD. If it is less than or equal to expectations the pair likely moves up. If bolder plans than expected are announced, the pair could continue to drop past critical support and sustain deep technical damage.
US: Weekly new jobless claims
US: Monthly NFP and unemployment rates, also average hourly earnings
Lessons For The Coming Week, Longer Term Market Movers To Watch
Bank of Japan officials have been leaking word that it is beginning to plan its own taper, along with promises that its eventual exit remains far in the future. This is a potentially huge development that should at some point rock global markets.
We learned some other important lessons that you should know about for the coming week.
See here for details.
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