Financial Markets – Preview for Week Starting 13th March 2016

Major Events of Last Week

The directional movements of the global financial markets were primarily driven by two major catalysts last week. First, investors were totally confused and bewildered after Mario Draghi, the President of the European Central Bank (ECB), seemingly gaffed when delivering a stimulus speech last Thursday. He succeeded in totally reversing the positive impacts of a new extensive range of monetary easing policies by advising that no more European interest rate hikes would be required. Secondly, oil prices extended their gains for the third successive week after the International Energy Agency (IEA) firmly stated that a market bottom had recently been recorded.  The major US indices surged upwards last Friday epitomized by the Dow Jones Industrial Average rocketing higher by nearly 220 points; the S&P500 rising by 31 points and the NASDAQ climbing by almost 83 points.

The ECB made desperate efforts late last week to counter the damage created by Mario Draghi when he announced new quantitative easing measures last Thursday. The ECB President completely stocked investors when he totally dismissed the option that any further interest rate reductions would be necessary in the future. His unexpected comments immediately caused the unintentional impacts of propelling the euro and bond yields substantially higher.

Initially, events went well when the ECB trimmed three of its main interest rates and introduced an innovative plan to encourage wide-spread bank lending within the Eurozone. These measures had the immediate desired effect of weakening the euro and initiating a surge in global equities. However, Draghi then ruined the party mood by informing that the ECB would no longer consider any further interest rate cuts in the future. This statement was sufficient to generate a substantial turnaround by propelling the euro higher by over 300 pips and driving stocks significantly lower in just a matter of minutes.

Leading ECB officials, who were monitoring these developments behind the scenes, were alarmed by investors misunderstanding their primary message, which was based on the concept that the new stimulus measures are intended to bolster growth by providing cheaper borrowing throughout the Europe for individuals and companies. They were concerned that Draghi’s statement created an adverse impression by implying that the ECB had now consumed all its available options.

Oil prices continued to strengthen last week after registering a multi-year low earlier this year. They were specifically boosted by a promising IEA report confirming that a solid market bottom had now been officially identified. Nevertheless, a number of prominent analysts advised that sizeable difficulties still existed primarily because of extensive US crude stockpiles.

What to Expect This Week

The Reserve Bank of Australia (RBA) will commence the week by presenting the minutes from its latest monetary policy meeting on Monday. This document could provide vital insights into whether the RBA is currently contemplating any further interest rate cuts in the imminent future. Later, the Bank of Japan (BoJ) will release its own minutes which are expected to confirm that no further quantitative easing actions will be initiated during the short-term.

On Tuesday, the USA will disclose its Retail Sales for February. This indicator is forecasted to replicate the results of the last six months by producing a value between 0.0% and 0.5%.

The United Kingdom will kick-off Wednesday by revealing its employment report for last month. Economists are predicting that the jobless figure will increase for the second straight month in a row although wage growth should negate such a bleak reading by rising towards 2%. Next, the USA will post its Consumer Price Index for February. The US Federal Reserve will be hoping that this major parameter can generate signs that inflation is now increasing especially following the recent strength in Personal Capital Expenditure and Average Hourly Earnings.

The pivotal event of the week will then occur during Wednesday afternoon, EST, when the Fed proclaims its interest rate verdict as well as supplying its latest forward guidance policies.  Rates are widely anticipated to remain unchanged within the 0.25% and 0.5% range. However, the US Central Bank could adopt a hawkish stance especially following recent signs of rising inflation and a significant rebound in risk assets. Australia will complete the day by posting its Employment Report for February. Employers are forecasted to have created 12,000 new jobs last month compared to the previous disappointing showing of -8,000.

No major events or data releases are scheduled for Thursday.

On Friday, the USA will terminate the week by issuing an important Consumer Sentiment Index. This indicator, generated by the University of Michigan, should stage a comeback this time around as a direct consequence of rallying stock markets and low oil prices.