Euro headwinds approaching
The single currency is under pressure: inflation stagnates while confidence indicators contract and January retail sales figures revised at 0.30% yearly and -1.40% monthly from initial estimates of 2.20% and 1.30%. This should prompt revisions in growth and inflation guidance from the European Central Bank – which meets today.
Although the ECB is expected not to change the refinancing rate, a new long-term refinancing of banks might come into play. Reactions on EUR traders will depend on Draghi’s sentiment at today’s press conference. Further monetary easing amid a potential economic downtrend should weigh on the single currency. Currently trading at 1.1310, EUR/USD is heading along 1.1267 short-term.
Lull before the storm?
Low interest rates, decent global growth, stable monetary policy from Europe and America and expansionary policy from Japan and China are all good for equities. Yet there might be overcorrection. The USA economy has slowed, so has the world’s, and the threat of recession has risen. The pace for annualized gain on the S&P 500 is a whopping 65%. Yet volatility is very low level, suggesting complacency. Perhaps it is the sweet lull of expansionary monetary policy that we have witnessed over the last ten years.
Corporate earnings have eroded leaving current valuations high unless there is a stream of good news (US-China deal, No Brexit, Dovish Fed, recovery in China growth). While the US Federal Reserve will accept inflation above 2% (which factors in wage growth), this will directly affect earnings. A strong global labour market pushes up prices even as growth decelerates. Labour costs are a lagging indicator: wages top after recession is well underway. For investors, a mildly defensive position with thematic trades plus diversification and rebalancing will smooth out coming volatility.
