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Draghi Launches Huge QE Program but Will it Save the Eurozone?

Well after much expectation and not a little grandstanding by the ECB President, given that he turned up late, he managed to deliver a package that succeeded in knee-capping the euro.

Given current momentum, we look set to see $1.1200 in fairly short order.

The reaction as far as equity markets is concerned has been more subdued but bond yields have fallen sharply to fresh record lows, which it is hoped will help boost lending.

So What Does the ECB Plan Actually Entail?

In this context, the currency war has been joined as the ECB announced that they would be expanding their asset purchase program to €60bn a month starting in March 2015.Euro/Dollar Spread Bets

There are expected to continue through until the end of 2016, with the purchases being investment grade only, which would exclude Greek bonds.

The program is an extension to the current Asset Backed Securities and Covered Bond program already announced.

Any purchases will be based on the capital key of each member country, up to a maximum of 30% of any new bond issue.

The rate on TLTRO’s has also been cut to the MRO rate at 0.05%, making it a significant easing program.

We’re Looking at You Greece

The announcement suggests that any exceptions to the investment grade criteria for assistance could only be for countries in a bailout program, which appears to be a direct message to Greece, and its election at the weekend.

So long as you remain in the euro then we will buy you bonds under certain conditions.

If you leave, then you’re on your own.

There will be no risk sharing on 80% of the asset purchase program and the bonds purchased will be anything from 2 years to 30 years and the purchase plan would include bonds with negative yields. Spread Betting on Eurozone Markets

The decision was not unanimous and there was no vote.

Draghi Pleads for Reform Once Again

While there is no question that this program appears to have beaten market expectations, there remains no guarantee that it will have the required effect in boosting inflation, and encouraging banks to start lending.

As if to reinforce this message, Mr Draghi was at pains to impress on European governments for the umpteenth time that they need to start structural reform programs and start liberalising labour markets and their public sectors.

With yields already at record lows and growth continuing to be difficult to come by, the big question remains as to whether this new program will get the banks lending.

This will be hard given that demand is so low and the new regulatory requirements mean that they have to reinforce their balance sheets against new financial shocks.

Unfortunately there’s the rub, as they will find it difficult to do both.

Will Crossing the Red Lines Actually Help?

The other obstacle to reform is the reluctance of countries like France, Italy and other euro members to stop prevaricating on the political front and start targeting integrated structural reforms to help boost their economies.

If this doesn’t happen then the likelihood is that we’ll be no further forward at the end of this program than we are now.

It’s been over 2 years since the start of Abenomics in Japan and we’re still debating how successful that has been.

To conclude, today’s announcement is more than we had expected, and it has crossed a number of Germany’s red lines, but the jury remains out as to whether it will be successful in the absence of any political will to enact reforms.

This is likely to be the message that German Chancellor Angela Merkel will be passing to Italian leader Matteo Renzi tonight, as the political dust starts to fly in Germany.

The conversation is likely to be something along the lines of ‘Matteo, I’ve crossed some German red lines to buy you more time to enact further reforms, so you’d better not let me down!’

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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Is the Euro Preparing to Bounce after the ECB Meeting?

Ahead of tomorrow’s ECB meeting, where markets expect QE to be announced, Michael Hewson asks whether the euro is seeing trend exhaustion and could see a significant bounce if Draghi disappoints.

  • The gold market is testing $1,300 as a loss of confidence in central banks and a potential triangle breakout targets $1,330
  • EUR/GBP seems to have found a base and may squeeze higher towards trendline resistance if it remains above its lows
  • EUR/JPY is looking to confirm a ‘Three White Soldiers’ candlestick pattern, with significant support at ¥135, which could point to a sharp short squeeze

 

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Video content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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Euro/Swiss Franc Sees Shock 30% Plunge as SNB Removes Currency Peg

The Swiss National Bank brought in the SFr 1.2000 peg against the euro four years ago in an attempt to prevent safe haven flows at the height of the euro crisis.

At the time, there was an awful lot of scepticism, with many believing that the bank would be unable to defend it within any success.

The fact that the peg lasted as long as it has is probably more to do with the fact that the European Central Bank has found it extremely difficult to ease policy as quickly as it would like in the face of German opposition to a full scale bond buying program.

In any case, history tells us that currency pegs usually have a limited shelf life as the UK found out to its cost on numerous occasions in the 1980′s and the 1990′s, when it pegged its currency to the Deutschemark, so there was always the prospect that the removal of the peg would end in tears.

Swiss National Bank Creates Incredible Volatility in FX Markets

Today’s surprise announcement that the Swiss National Bank has finally bowed to the inevitable and has thrown in the towel and removed the peg caught everyone by surprise.Euro/Swiss Franc Spread Betting

The shock prompted a sharp, aggressive pyroclastic flow of euro selling and Swiss currency strength as the franc surged on the foreign exchange markets.

The Swiss central bank also slashed rates even further into negative territory in an attempt to cap or deter further safe haven gains against the euro.

At one point the EUR/CHF cross rate dropped around 30% from SFr 1.20 to SFr 0.85 before rebounding back above parity.

What this means for central bank credibility is hard to gauge given the SNB’s insistence it would defend the peg with utmost determination.

However, it also suggests that we are about to get a whole lot of new euro weakness as a result of the recent positive ruling from the European Court of Justice about the legality of a possible QE program.

The SNB appears to be acknowledging that it can’t defend its currency from any new attempts to try and weaken the euro, as the ECB tries to stimulate Europe’s sclerotic economy, and is trying to mitigate this by launching new measures to try and deter further inflows into its currency.

The short-term effects of this are, as we have seen, not pretty, but what it does tell us is that not even central bankers have all the answers, and going forward the damage to central bank credibility, which is already wafer thin, could well become even more stretched.

Surprise Move Has Wider Impact than Just the Franc

The Swiss stock market has also slid back sharply as the companies that are based there will find that their exports suddenly become much more expensive, with the resultant hit to margins that will entail, while broader European stocks should feel the benefit as the euro weakens.

Switzerland suddenly got a whole lot more expensive and for chocolate lovers Nestle and/or Lindt just got a price bump.Online Forex Trading on the Swiss Franc and Other Currencies

This will ultimately damage the Swiss economy further and it is largely due to the inability of European politicians to fix their own fiscal problems, and their insistence that the ECB do the job for them, in the face of an inability to implement structural reforms.

Ultimately central bankers can create the bridge to help in the reform process but ultimately politicians have to want to cross it and in Europe there is no evidence that this is likely to happen, and this could have significant consequences for those economies that orbit around it.

The Polish zloty and Hungarian forint have also been hit hard in this morning’s fall out.

The ripple out effect of this is likely to be hard to quantify, and we could well get a lot more volatility as investors and markets in general try and work out what this sudden change in policy means for future central bank promises going forward.

However, it seems likely that the US dollar could well benefit, as well as gold, as investors look again at the more traditional havens.

This morning’s moves also highlight how fragile financial markets still are nearly six years after the financial crisis despite trillions of dollars of central bank largesse.

The risk is that markets start to lose faith in these new masters of the universe as investors look at central bank promises with large dollops of scepticism.

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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Poor Christmas Sales Expected to Round Off Torrid Year for Big Supermarkets

This week’s record sales for John Lewis appear to have set the tone for this week’s trading updates from high street bellwethers, Marks and Spencer, Tesco and Sainsburys.

The main takeaway appears to be the continued growth of online shopping and the increased popularity of ‘click and collect’ services.

The unseemly scrum that was ‘Black Friday’ certainly helped John Lewis in this regard, as did its food division in the form of Waitrose, but while sales grew sharply it remains to be seen what the cost was in relation to the company’s margins.

Christmas Results Will be Key for Supermarkets

While John Lewis appears to have done well from the pre-Christmas shopping bonanza it remains to be seen as to whether Marks and Spencer, Tesco and Sainsburys will have performed equally as well, but with expectations so low we could see a surprise to the upside.Spread Betting on Supermarket and Retail Shares

Marks and Spencer is expected to report mixed numbers with its food division once again doing the heavy lifting, while its general merchandise is likely to see sales fall from a year ago.

This decline is largely as a result of the milder autumn, though the pre-Christmas cold spell may well have seen sales pick up, in the same way they did for Next when they reported at the end of last week.

Of particular interest this week will be the trading updates from the big supermarkets given this week’s revelation that Lidl managed to sell more champagne than milk over the Christmas period.

Both Tesco and Sainsburys are expected to announce a fall in like for like sales over the Christmas period as Aldi and Lidl not only continue to eat their lunch, but also appear to be scoffing their dinner as well.

This will bring an end to an awful year for the UK’s biggest food retailers, with the prospect that 2015 is likely to be equally as tough.

Tesco to Outline Restructuring Plans

Tesco in particular will be in focus given that we will also get to hear from new CEO Dave Lewis about some of the company’s restructuring plans, against a backdrop of a disappointing set of Christmas numbers.

There is speculation that Mr Lewis could announce the sale of Blinkbox its streaming video service as well as the possible disposal of its Asian business.

We could also get details of a plan to offload some of its property assets after yet another profit warning last month.

The sudden change in consumer shopping habits has made the likelihood of large new stores being built much less likely, meaning that Tesco amongst others is likely to be forced to offload some of this recently acquired land to free up spare cash. Trading on the UK Retail Sector

The plus side is that there should be plenty of ready buyers in the form of house builders who are looking for extra land to build the thousands of extra houses needed to help solve the UK’s housing crisis.

Management reaction to the latest trading update as well as last year’s profit warnings is likely to be key, given that confidence surrounding the company remains extremely fragile in light of recent events.

As such this week’s announcement by Dave Lewis, the new CEO, is likely to be closely analysed.

Is this the Bottom for Tesco and Sainsburys?

Despite all its problems, Tesco remains the UK’s number one grocery retailer with about 28% of the grocery market.

However, it appears to have over reached itself and that share of the market has fallen by 2.7% in the last 12 months alone, which suggests that we could see that market share fall further.

The big question now being asked by shareholders, who have endured a torrid twelve months, is whether we’ve seen the lows in the current down move.

Both Sainsburys and Tesco are trading just above their multi year lows, having lost 37% and 45% of their value since the beginning of 2014.

This week is therefore important in the context that it could well set the tone for the rest of the year for this beleaguered sector, which while bad news for shareholders could well be good news for consumers.

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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What to Expect from Stock Markets in 2015?

In this Christmas update, Michael Hewson discusses the performance of stocks markets during 2014 and what can be expected from the New Year.

  • Falling commodity prices have really limited the FTSE 100 by weighing on the miners and energy stocks but will we see a rebound in 2015?
  • The S&P 500 has outperformed the other equity markets but will this continue?

 

Spread Betting & CFD trading carry a high level of risk to your capital and you can lose more than your initial deposit. Only speculate with money that you can afford to lose. These trading products may not be suitable for all investors so seek independent advice.

Video content by Michael Hewson of CMC Markets

The contents on CleanFinancial.com including any articles or videos are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice or form the basis of an of investment decision.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

Content provided by CMC Markets. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the UK, registered offices, 133 Houndsditch, London, EC3A 7BX.

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