Euro Markets: ECB Stance Supports Stocks
Stock-Markets / Global Stock Markets Dec 28, 2017 - 03:51 PM GMT
Global stock markets managed to garner most of the public attention in 2017, as a strong sequence of new record highs was posted in many of the most closely watched equities benchmarks. But the real question is whether or not we will see quarterly earnings performances through the next few quarters that actually support these rallies. At the macro level, we are still seeing several scenarios that support the bullish outlook in these areas. But if you are an investor that is focused on the Eurozone region, it will be critical to watch for new developments within the central bank.
At its most recent meeting, the European Central Bank (ECB) outlined its plans to continue with its monetary stimulus programs if it is found that there is still sufficient need for economic support. Key indicators here will be the regional unemployment rate, as there is still limited reason to believe that we will see any material changes in the underlying consumer inflation level any time soon. Additional factors to watch will include industrial production, as this is a critical predictor of both the regional unemployment rate and the trend in consumer price pressures.
The impact on the Euro has already become apparent, as the Guggenheim CurrencyShares Euro Trust (NYSEARCA:FXE) is now posting a series of lower highs on the daily charts. If we are not able to see a clear break back above the 115 level, we will maintain the negative bias on the assets that are most closely tied to the Euro. The ECB is in no position to begin raising interest rates at this stage, as overall growth figures remain tepid and most of the voting members within the central bank seem to be suggesting the need for more stimulus sometime later. To the downside, FXE faces important support levels at 112.95 and a break here could accelerate losses to the downside.
When we are dealing with stocks, the outlook is clearly different as the iShares MSCI Eurozone ETF (NYSEARCA:EZU) is still holding near its highs. These types of trends are typically traded through exchange traded funds because the weaker outlook on the interest rate front suggests that corporate earnings should continue to be supported by a flexible monetary environment. In other words, a large number of European should be aided by these stances in a number of different sectors.
The ECB could be one of the most closely watched central banks in 2018 as there is still conflicting evidence that monetary stimulus is needed in the region. If this is the case, it will not likely help the positions for investors positioned with exposure in currency markets assets. But if you are looking at the corporate sector as a means for new trading ideas, there is likely to be a very different outcome if the ECB maintains its current outlook for the economy.
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