uropean markets look set to open slightly higher this morning, helped by yet another record finish for the S&P500, and a decision by Chinese authorities to help underpin their economy by speeding up infrastructure spending on railways, while all eyes here remain fixed on this afternoon’s ECB meeting and press conference.
This week’s decline in EU inflation has once again increased calls for the ECB to outline further steps at easing monetary policy this week, particularly in light of Bundesbank President Jens Weidmann’s comments last week about the prospects of some form of QE. The shift in tone has been seized upon as evidence that the ECB might be on the brink of a seismic move in policy.
This seems highly unlikely judging by the reaction of the currency markets
that quite rightly see it as more evidence of the ECB’s impotence when it comes to monetary policy compared to the US Fed and the Bank of England.
While current price pressures may well be weak, they are largely as a result of falling energy prices, which is not necessarily a bad thing, something a lot of commentators appear to be overlooking.
That’s not to say that there isn’t a deflation problem in Europe, there is, but there’s not much the ECB can do about it given the massive disparity in unit labour costs across the region.
The perception for now is that last week’s intervention by Weidmann is the latest attempt by the ECB to try and keep a lid on the current strength in the euro and nothing more, an attempt that was quickly undone by recent comments from Fed Chair Janet Yellen earlier this week, in an apparent clarification of remarks she made last week, when she reinforced the Feds commitment to extraordinary policy “for some time to come”, citing considerable spare capacity or “slack” in the US economy, as “taper” gives way to “slack” as the new buzzword in the global economy.
So what to expect for today given the current economic backdrop, as calls for further action increase.
The consensus still remains for rates to remain on hold, but it is slowly shifting to some form of action with some predicting a cut of 0.15% in the headline rate and a negative deposit rate. This still seems unlikely at this stage, and even if implemented would have little lasting effect after the surprise factor had been digested.
On the subject of a negative deposit rate, the implementation of such a measure could well do far more harm than good, particularly with so many European banks already struggling for profitability and looking to build up their balance sheets in preparation for the upcoming “Asset Quality Review” so that they can pass the ECB mandated stress tests due later this year.
While one might consider such a move it is hard to see how much difference it would make in the context of the current economic climate in Europe, which, while still weak remains more positive than negative on the economic activity front, unemployment notwithstanding.
When coming to a decision one should also consider last month’s economic assessment of conditions in the euro area, which pointed to consistent below target inflation, but no deflation threat, a stance reiterated by ECB President Draghi last week, where he once again compared the euro area to an “island of stability.”
This doesn’t sound like someone about to embark on further easing measures, particularly given that recent economic data continues to encourage, deflation concerns notwithstanding.
As such it will be Mr Draghi’s press conference that will dictate how markets move in the aftermath of today’s decision.
Furthermore, any action this week would be tantamount to admitting that last months newly announced growth and inflation forecasts, would probably need revising.
This week’s European manufacturing PMI’s were more good than bad and today’s services PMI’s are also expected to paint a similar picture, with Spain services PMI’s expected to show a modest improvement to 54.1, and Italian, French and German expected to stabilise around their February levels, well above 50.
Over half way through the week, and today we have Tate and Lyle releasing their Full year 2013/2014 trading update.
What will be particularly interesting about this update is that the firm released its Q3 update back in February, and it came in worse than expected. Falling prices of sucralose driven by competition in China has meant the firm is getting less for its unit costs in terms of revenue, squeezing it’s profit margins. This is worrying for a firm who not that long ago was relegated to the FTSE
250 like a naughty school child having lost nearly 23% of its share price over the last 12 months.
It is possible that Q4 could have been surprisingly strong, and that these full year results will be passable with their non sucralose businesses despite the increased competitive landscape. They are diversifying their group, having acquired Winway Biotechnology last month, but not enough positive sentiment is swaying the brokers at this stage.
In general, they received hold ratings across the board, with price targets of 900p coming from Deutsche, but a target of 740p from Societe Generale – so the uncertainty extends through the analysts and brokers right through to the investors. The stock therefore dropped nearly 1% on the final bell yesterday to close at 650.5p- inching closer toward that 52-week low of 618.5p seen earlier in the month.
Also in focus is Dunelm (Q3 Trading), Booker Group (Q4 Interim) and Hyder Consulting (Pre-Close Trading statement).
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