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    Weekly Market Review 19-25/10/2015

    Draghi for Start and Earnings for Dessert

    Though there are a number of central bank policy decisions to be made this week, there’s little doubt that the spotlight will shine on the European Central Bank. The FX market in particular is especially keen to hear Mario Draghi’s blueprint on how he intends to lift the Eurozone up out of its economic malaise. His decision will have a huge impact on the Euro’s future direction. For equity investors, this week the focus is on Wall Street where a slew of key earnings reports will be released as earnings season commences. Collectively, they speak to the health of the US economy and thus their outcomes could alter not just sentiment but momentum.

    Eurozone’s Outlook Still Cloudy

    There have been some encouraging indicators in the Eurozone, across numerous sectors, including retail sales, exports and industrial production. Tempering that positive news, the Eurozone’s workhorse, Germany, has lately had only middling results. On the whole, that doesn’t bode well for the EU economy. Eurozone inflation remains a seemingly immovable obstacle when you consider that core inflation is still relatively tepid. Certainly, the ECB target of 2% seems in little danger of being bulls-eyed anytime soon.

    Will Mario Take the Euro to the Brink of Parity?

    The markets still have high hopes that the European Central Bank will make some move toward more easing. Yet, the greatest worry seems to be the lack of conviction from Mario Draghi and the ECB. Though over the past many months the ECB has attempted to spark a recovery with its QE scheme, the jury is still out on its effectiveness. Many view the ECB’s efforts as akin to using a teaspoon of dirt to fill in a crater when what is needed is a shovelful, and quite a few at that.

    If on Thursday the ECB does finally act, with conviction or not, meaning more easing, the Euro will depreciate further, in the short term. If Mario takes the dovish wait-and-see stance, the Euro might stabilize in the short term. However, in the longer term, the Euro could come under pressure as the lack of growth weighs. For now, the Euro’s parity with the Dollar continues to be just out of reach.

    Earnings Season Could Dispel Fears or Justify Jitters

    On Wall Street, investors will focus on the impact that earnings season is likely to have on the S&P500, the Dow Jones and the NASDAQ. While the benchmarks have been creeping higher and higher, equity investors are jittery as the dismal news continues to cascade from China. The expression “It’s a small world” has never been more relevant as investors ponder the repercussions from China’s downturn. Regardless of the connection, direct or indirect, Wall Street’s heavy hitters all are feeling the pinch of the slowdown.

    But to what extent? Which begs the question how long before the other shoe drops? Investors are fearful of a “correction,” in any market, which would roll like a tsunami towards the others.  If Wall Street’s earnings reports are, generally better, than expected than those fears could be dispelled, at least for the time being. A miss on earnings could validate investors’ fears and weigh on Wall Street.

    Down to Business

    Markets will wait to see what Super Mario and the ECB plans to do about the increasingly precarious situation in the Eurozone. The ECB’s options are pretty clear: Act or don’t act. With the former, the Euro could move broadly lower in a knee-jerk reaction, though that might be short-lived. Under the latter, investors’ knee-jerk response could give the Euro some short term stability.

    Now, what about Wall Street? Earnings reports which are generally better than expected could quell investors’ concerns, for the moment. On the other hand, a disappointment would seem to be justification for market worries and could send the benchmarks tumbling.

    On the plate

    RBA Meeting Minutes(Tuesday) – If the protocol from the latest RBA meeting will suggest the easing bias to continue the Aussie could weaken vs the Dollar and the Yen.

    Bank of Canada Rate Decision(Wednesday) – If the BoC will decide to slash the benchmark rate again the Canadian Dollar could be hit vs the dollar and the Yen.

    ECB Rate Decision(Thursday)- Will Draghi unleash further easing ? Will Draghi finally push the Euro to parity ? All of those burning questions could be answered after this month’s ECB Rate Decision.

    Chart of the Week: Nasdaq100

    nasdaq100 weekly chart


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