Overnight equity markets posted strong gains, and euro was dumped. The risk uptake spread over to the Asian session today.
ECB President Mario Draghi indicated that the trans-national central bank is willing to step up its stimulus programme, as the euro-zone grappled with a sluggish recovery and persistently weak inflation. He said late Thursday, ‘It was not a wait-and-see, but it was a work-and-assess. We are ready to act if needed, we are open to a whole menu of monetary policy instruments.’
He added that the degree of monetary policy accommodation will need to be re-examined at the December meeting when the new economic projections will be available. Draghi’s statement paved the way for more unconventional monetary expansion in December. It left few doubts that the ECB is preparing to do more at its 17 December meeting if the incoming Eurozone data, particularly on growth and inflation, disappoints. In addition, discussions around a deposit rate cut is back on the table. The deposit rate has been at -0.2% since September 2014, and previously, Draghi signalled that additional cuts are not on the cards.
Now, many analysts expect further easing options to include further interest rate reductions and an augmentation to the €1.1 trillion asset purchase programme, either by increasing the pace of buying or stretching it beyond September 2016.
Asian equities were taken higher on Friday, where helped them ending the week on a positive note. In China, smaller-cap stocks outperformed the blue chips on the week, where the Shenzhen Composite (SZCOMP) closed up +2.5%, versus the +0.6% added by the Shanghai Composite (SHCOMP). As I mentioned earlier, the SHCOMP continued to be capped by the formidable 3500 level, where a large number of sell orders is suspected to be lurking just above the handle. Failure to close beyond this level should limit gains on the index. Japan and Australia also performed relatively well on the week, with Nikkei 225 and ASX 200 ending +2.9% and +1.6% higher. In Singapore, the STI looks set to close with more than 1% gains, and comfortably above the 3000 level.
Potential volatility next week
Events in the coming week are likely to induce market volatility, which has been more subdued this week. The volatility index dropped below 15 yesterday, the lowest in two months. This may change next week. Several events deserves attention. Biggest of them is arguably the FOMC meeting on 27- 28 October. Despite it being a ‘live’ meeting, the Fed, without a doubt, is not going to raise interest rates at this meeting, with market pricing in a 6% probability.
The ‘will-they-or-won’t-they’ question has been flooding the minds of investors. That question of whether the Fed will even raise rates this year. To be sure, the FOMC is not going to make any calendar-based comments in its policy statement, as per usual practice. What we are going to focus on is the Fed’s outlook for the US economy and inflation going forward, as well as other cues pointing towards further delays.
Recent weakness in jobs data produced evidence in support of labour market slack. The lack of wage acceleration underscored the situation. This is not to say that the growth recovery in the US is falling off the cliff. I feel growth momentum would remain moderate.
Furthermore, the persistent weakness in core inflation continues to restrain the Fed’s resolve to normalise rate policy. The risk of a rate hold for the rest of the year is tilted to the upside, given the low inflation environment and gloomier projections of global growth. It is worthwhile to note that there is no press conference at the October meeting.
The Bank of Japan will also announce its monetary policy next Friday, 30 October. Some economists are anticipating more monetary stimulus measures to be taken at the meeting. I expect the BOJ to maintain the current pace of bond buying at ¥80 trillion a year, and probably reiterated recent rhetoric around inflation. The central bank will also announce the latest forecasts for inflation and GDP.
China will convene the 5th plenum for the Communist Party of China Central Committee, which will be over 26-29 October. The top agenda is expected to focus on GDP growth targets, key reforms and industries development.
Meanwhile, earnings season in the US is continuing, where 167 companies on the S&P 500 will release their earnings reports. Notable among them will be Apple, Exxon Mobil, Colgate-Palmolive, and Twitter.
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