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Adding to the demise of regional equities, the leads from overnight trade were not particularly encouraging as US and European markets struggled. The European Central Bank meeting was perhaps the most significant event for the week as this stimulus dependence drags on. It seems investors were broadly disappointed by the outcome of the meeting as depicted by the price action in bond yields, equities and the euro. While no change was expected from the meeting, it seems investors were hoping for some commentary, suggesting the deployment of QE was imminent. Additionally, the market is looking for some conformity in the action the ECB would take, at the moment it just seems a bit ambiguous. All we know is that the ECB wants to increase the size of its balance sheet by around a trillion euros. It seems the general feeling amongst the ECB members is to assess the situation in Q1 of next year before making a call on the next step. However, judging from the comments made by Mario Draghi, there isn’t much optimism about the economic outlook. Growth forecasts were lowered significantly with 2014 cut to 0.8% from 0.9%, while 2015 was cut to 1% from 1.6%. Inflation was also lowered significantly and Draghi went on to say this is unacceptable. As far as assets under consideration, Mario Draghi said the ECB has considered buying all asset classes excluding gold. This was hardly significant though, as sovereign bond purchases are what the market is really concerned about.
Resources weigh on the ASX 200
The ASX 200 has been tracking China all week and the sharp reversal in the CSI today hasn’t done local equities any favours. There has been a lot of talk around China reform with reports suggesting the Banking Regulatory Commission is looking to allow wealth management products to open accounts and directly invest in bonds and stocks. Perhaps the fact we didn’t get confirmation of this has been a key driver of the reversal we’ve seen today. While the CSI is struggling, the Hang Seng has gained some ground with growing talk that stocks are much cheaper in Hong Kong than mainland China. This could also explain the discrepancy between the Hang Seng and other China indices. Resource names have led the losses on the ASX 200 with energy names declining on the back of renewed oil price weakness. Just as investors were starting to feel we could see some stability in oil prices, Saudi Arabia came out again and cut all January prices to the US and Asia. This could result in a renewed wave of selling in some of the energy names as nerves grow. Outside of resources, the next couple of months will be all about interest rates following a disappointing bout of local economic data. Rate cut calls continue to roll in with Westpac calling for cuts in February and March 2015. The bank highlighted weak GDP, falls in commodity prices and ailing consumer confidence as the key factors.
Payrolls in focus
Ahead of the European open, we are calling the major bourses modestly firmer. This will see equities recover some of the ground lost in yesterday’s trade. The euro has been relatively steady but I suspect we could see renewed EUR/USD weakness, particularly should the greenback extend its gains. The USD is already seeing some positive momentum and if today’s data impresses, we’ll only see these gains extended. The market is expecting 230,000 jobs added which is a rise from the previous month’s 214,000. The unemployment rate is expected to remain steady at 5.8% and average hourly earnings up 0.2%, a slight improvement. Some analysts have gone as far as saying they expect the previous month’s jobs numbers to be revised higher as well. Any developments in average earnings have a bearing on inflation and therefore will be watched very closely. Apart from jobs, we also have trade balance data and Federal Reserve members Fischer and Mester speak. Dallas Fed President Fisher suggested the Fed is closer to raising rates than is generally expected and this played a role in the greenback’s strength.