This week’s highlight is likely to be the ECB meeting, where investors largely expect to see some sort of action to stimulate the ailing economy. Last week’s surprise decision by the Swiss National Bank saw expectations for ECB action ramp up as analysts saw this as the Swiss pre-empting an ECB move.
There will be plenty of nervousness around the ECB given markets seem to have fully priced in aggressive action. As a result, the risk of disappointment seems quite high. Apart from the ECB, we also have the BoJ, BoC and BoE to look out for. At the same time we have US earnings coming in thick and fast and China’s Q4 GDP data. We will also have Greek elections on January 25 which will set the tone for European markets heading into next week’s trading. Polling heading into elections will present some headline risk for markets this week.
Bloodbath in Chinese equities
Asian markets got off to a great start with the ASX 200 and Japan’s Nikkei leading the way early. However, China seems to have spoilt the party with the Shanghai Composite dropping around 5% as brokerage stocks stumbled.
Citic Securities and Haitong Securities shares were aggressively sold off after regulators suspended the companies from margin activities. While this is putting a dent in equities in the near term, the intentions seem good as officials continue to reign in reforms and curb excessive speculation. Developers are also struggling as China’s property prices remain a big source of concern.
The ASX 200 was around 1% firmer in early trade, but has since shed most of this gain with weakness in China contributing to the reversal. The energy space is feeding off the bounce in oil prices with gains with solid gains for Santos, Oil Search and AWE.
Materials stocks are also doing well with precious metals names continuing to hold their ground. Financials have been the real source of weakness with all the big four banks turning negative. Macquarie Group managed to hold on to its gains, which are on the back of an upbeat trading update. It’s clear the stars are aligning for the investment bank and this should not be a surprise, given conditions have been improving for MQG, activity has picked up and US earnings are a net positive contribution.
Record start for the DAX
Ahead of the European open, we are calling the major European bourses firmer with the DAX likely to print another record high. Just looking at the bond markets in Europe, it is clear markets are pricing in aggressive ECB action. EUR/USD continued to decline significantly and even ventured below the $1.1500 handle in Friday’s trade, printing a low of $1.1460 (weakest since 2003). The pair has since recovered to $1.1553, but momentum is firmly to the downside and traders will be looking to sell the pair into strength.
The arguments around the ECB will stretch far and wide including the size of the program, whether it is unsterilised, open-ended and any potential conflict/split within the ECB as a result of the action. On the European economic calendar today we have current account data and the German Buba monthly report. US markets will be closed to start off the week for Martin Luther King break. Once trading resumes, investors will be focussed on earnings as the Fed’s blackout period kicks in.