The reverberations of the Swiss National bank’s decision to abandon the franc’s floor on Thursday will continue to be felt in global and Australian markets this week.
In many ways the news that the 30% appreciation of the Swiss Franc against the Euro which caused Forex brokers to close has now claimed at least one hedge fund is likely to be the dominant theme in the early part of the week as positions are scaled back.
That means the local stocks could benefit (SPI 200 futures suggesting a 76 point gain on Monday for the ASX) as position squaring in the markets that have been under acute pressure recently – oil, copper, and the Aussie dollar – could find continued support (as we saw in all three assets Friday), which can then form a positive feedback loop for the Australian share market.
But the other impact of the increased volatility and smaller positions that will naturally ensue from this is that markets will become more prone to overreactions from data and events this week. We might see some prices whipping around.
Which makes the release of Chinese GDP for Q4 on Tuesday even more important and market-sensitive than usual. The pundits are looking for a slight deceleration of the year on year rate to 7.2% from 7.3% last quarter and a quarter on quarter rate to drop to 1.7% from 1.9%. This is super growth for any other nation, but an undershoot (or even an overshoot) could cause huge ructions.
The other big events for the week internationally are the ZEW survey in Germany, also on Tuesday, the Bank of England’s MPC cut release.
But the huge event for the week is the ECB interest rate announcement on Thursday night. Mario Draghi, who has been promising action but never delivered it, is widely expected to finally take the plunge into full blown QE, and his statement and press conference are the highlights. Rightly or wrongly the market has assumed that the actions of the Swiss were as a direct result of a heads-up from the ECB on the size and scale of the massive QE to be announced on Thursday.
It’s worth noting that Benoit Coeure, a member of the executive board of the European Central Bank, told The Irish Times in an interview last week: “The only thing I can say is that for it to be efficient it would have to be big.”
There’s some expectation-setting for you.
Indeed the Euro fell to a low of 1.1460 on Friday night from a high of 1.1871 earlier in the week on speculation that the ECB is coming with a monster QE program.
Any deviation from this will be felt in currency and stock markets with the Euro rallying sharply (taking the US dollar down and the Aussie dollar up) while European stocks, buoyed recently by the lure of free money, are likely to collapse and taking other stock markets with them.
As if that’s not enough, Friday sees the release of the raft of flash manufacturing PMIs including the Chinese data.
Of course, there is a little local data to focus on in Australia with the release of the TD Securities monthly inflation data Monday which will take on more significance than usual given the fall in petrol prices and room this gives the RBA to cut in either February or March. Motor vehicle sales are out Monday also and the HIA new home sales data is out Thursday.
But the key local data for the week is going to be the release of the Westpac Consumer confidence survey for January. Have lower petrol prices, close to the $1 a litre mark in Sydney, fed into a boost in sentiment, as the text books say it should? Or has the money been saved and consumers retained a glass half empty view of the world? We’ll know at 10.30am AEDT Wednesday.
The other element in the confidence equation lately in Australia has been the federal government, and recent weeks haven’t helped. Tony Abbott has been forced to abandon plans for a $20 cut in the Medicare rebate for short GP consultations after an outraged medical establishment rounded on the government for its lack of consultation, warning that the cut in the rebate would have to be passed on to patients. (News Corp reported today that Abbott decided to push ahead with this plan despite being warned against it by senior ministers including Joe Hockey. People might not follow the ins and outs of the politics but they will be aware of the plans for the rebate, and that it was dropped. None of it helps with public confidence, where the government has an ongoing problem.
Global leaders are also in Davos at the World Economic Forum this week so there will be plenty of comment on the global economy and recent market turmoil.
The ECB decision always promised to make this an uncommonly important week but the Swiss National Bank decision and recent market volatility has heightened market tensions and increased turmoil.
Even though most of the catalysts are coming from overseas this week it’s going to be a big one.
Here’s Westpac’s excellent calendar of events and data releases for the week. Please note US markets are out Monday for Martin Luther King Day.