European futures are trading lower this morning after the disappointing earnings drom the US impacting the sentiment. IBM released their third quarter number and it wasn’t something that you want to keep looking at. The company’s revenue came much below the expectation and they blamed this on two ongoing issues: Firstly, the strength of the USD. Finally, the slowdown in Asia. Most of the bad print in their earnings report was predominantly from the Asian region and as long as the situation does not start to strengthen there, it is difficult to knit a scenario how the firm will be able to win this battle.
Commodity prices may remain under pressure once again after the well decorated GDP number which was released in China on Monday. The number has caused extreme sell off in the commodity space, especially, for copper. We are expecting this sell off to continue and industrial metals may lose more attraction amid investors.
Although, the main event for this week is the upcoming ECB meeting and there is no question that the focus is very much on the action/s which Mr Draghi will take. It is widely expected that his tone will be very dovish given the Eurozone region is swimming in a sea of deflation and in order to fight the thorns of deflation- more stimulus is needed. Market participants are largely expecting some sort of announcement under which the ECB will provide more details on new instrument through which they will be able to inflate their balance sheet.
The strength of the euro is something that the ECB must be feeling uncomfortable, especially any level above 1.15. The ECB policy member did not hesitate to communicate their thoughts and indicated that the bank need to add more instruments to inflate its balance sheet to spur growth in the region. His comments had a direct action on the euro rally and this took some wind out of it. The currency could see some intense selling pressure if the central bank embarks on cutting the interest rate even lower. Mr Draghi has repeatedly said that the bank will use all instruments at its disposal to get to where they need to be.
However, the odds are not stacked high enough for the ECB to use this option and they may use an alternative route rather than pushing the negative rate even lower. The alternative path is to inflate their QE program. The bank can achieve this by extending the end date or alternatively just increase the firepower of their guns and start loading more. Nonetheless, ahead of this meeting, we are expecting more pressure for the euro against the dollar.