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Oil exporters feeling the pinch

Equities are bid in Asia as optimism continues to grow ahead of tomorrow’s much anticipated European Central Bank (ECB) meeting.

Oil
Source: Bloomberg

In the US, investors continue to focus on declining energy prices with oil and gas both declining along with corporate earnings. Earnings have been underwhelming to say the least, particularly in the banking space where the big financial institutions are experiencing lower trading revenue and tougher conditions. Some of the banks are also now calling for lower EPS growth for the S&P, hurt by lower oil prices and a firmer USD. Morgan Stanley and Johnson & Johnson both disappointed, contributing to investor concerns about earnings. The IMF downgrade has been blamed for renewed weakness in energy markets but I feel it’s merely a fact of demand/supply dynamics remaining skewed to the supply side. One economy that’s in a precarious position due to the current state of oil and gas prices is Canada. The CAD continues to be on the defensive, as we head into the Bank of Canada (BoC) meeting. The country is facing a benign inflation outlook and the sharp falls in oil and gas prices will negatively impact growth expectations. USD/CAD squeezed through the $1.2000 barrier with the momentum remaining skewed to the upside.

ECB meeting in focus

With most of the optimism being driven by stimulus hopes, the big risk for markets at the moment is if the ECB underwhelms/disappoints. The ECB is targeting a substantial balance sheet expansion and as a result they will have to come out swinging for them to appease investors. The headline will be the size of the programme on a nominal basis with expectations being for a €550 billion plan. The composition will also be critical including the investment grade of bonds under consideration, time to maturity and of course the pace of purchases. Analysts will also want to know whether the program is open ended and of course the wording will carry significant weight when the press conference takes place. Until we get some clarity, investors will continue to watch the moves in bond yields and the euro very closely. EUR/USD has managed to hold onto the $1.1500 handle but momentum is still heavily skewed to the downside. While any disappointment in the ECB will likely lead to a reversal higher in the euro, this move is only likely to be short term and it wouldn’t be long before the selling resumes. European equities are in a good space at the moment and we are calling them higher yet again with optimism continuing to ride high.

Asia treks higher

Looking around the region, China has maintained its momentum from yesterday’s trade after markets had been savaged on Monday. Equities in China are experiencing a good recovery after yesterday’s data essentially quashed fears of a China hard landing. Focus shifts to the 2015 growth target which will be announced in March. This will essentially give us an idea of how aggressive Chinese policymakers will act this year or whether they will press on with reforms depending on what sort of bar the target sets for them. Recent releases from China seem adequate enough to see  easing expectations pushed back a bit. The ASX 200 is enjoying a day in the sun with broad based gains led by the materials. BHP Billiton is trading higher after forward guidance was maintained in iron ore, petroleum and copper following the release of its quarterly results. It seems the investment community was expecting the recent commodity price moves to have a bigger impact. Rio Tinto has surged on speculation the company will announce a special dividend in coming weeks. Westpac consumer sentiment showed some improvement and this has given a kicker to the banks and other consumer related sectors.

 

 

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