Global central bank action has been a key theme all year and it seems we’ll finish 2014 in exactly the same way we started. While Fed policy expectation continues to pop up everytime - US data shows signs of faltering - the spotlight at the moment certainly seems to be on the ECB and the PBoC. The ECB has been increasingly vocal in recent weeks, as a sombre economic picture has forced it to consider buying other assets. By ‘other assets’, investors are looking at sovereign bond purchases as a potential game changer. This has made European equities very attractive with bond yields falling in anticipation of QE. The DAX has led the gains and I suspect other bourses will start to play catch up as German equities nudge towards record highs. As far as next week’s ECB meeting is concerned, it seems the market may be paring back expectations of immediate action after ECB Vice President Vitor Constancio suggested they will continue to assess data until Q1 next year before making a call. Should data continue to disappoint following action that has already been taken, then the ECB is likely to expand its asset purchases. These comments suggest bad data is now a positive for European equities. There is also potential risk coming from Greece with bond yields spiking on concerns around the disbursement of the last tranche of aid.
Capex numbers surprise
Equities in China have been choppy today with investors continuing to digest the recent policy measures taken by the PBoC and what this means for policy going forward. Additionally, we received industrial profits data that showed a 2.1% contraction. This is hardly surprising given the drop off in activity and should the economy continue to move backwards then a prolonged easing cycle could eventuate. While the slowdown in China is also having an impact on Australia, the latest round of capex data actually surprised to the upside. Not only did Q3 private capex rise 0.2% (versus -1.9% expected), intended spend for FY15 was revised up to $153 billion (from $150 billion). While the data had mildly stronger implications for Q3 GDP, the RBA is likely to remain concerned particularly as companies continue to cut spending. AUD/USD managed to get a bit of a kicker from the data after plunging to its lowest since 2010 yesterday. The pair printed a low of $0.8480 and I suspect this will be tested again in the not too distant future. There are growing calls for the RBA to cut again next year and moves in commodity prices are also mounting pressure on the local currency. Energy plays have struggled in Australia as investors exercise caution ahead of the OPEC meeting. Oil prices continued to struggle in Asia with investors unconvinced output cuts can be agreed to support prices.
Firmer open for Europe
Ahead of the European open, we are calling the major European bourses firmer. The
DAX is inching closer to the 10,000 level and could be testing its record high of 10051 in coming weeks. All data prints heading into next week’s ECB meeting will be eyed closely and today we have German CPI and another Mario Draghi speech being the key events on the calendar. Meanwhile EUR/USD is trading at $1.2500 which is also a key level. There is also a downtrend resistance line which comes in at $1.2500, a rejection of this level this could see November lows retested. This resistance line has been in place since August. US equity markets will be closed for Thanksgiving and therefore most of the attention will be on Europe.