Thungen Financial 5th June 2014 - European Economic Special

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Thungen Financial 5th June 2014 - European Economic Special

Markets globally have been performing exceptionally well this past few weeks and one of the main reasons could be due to the European Central Bank meeting later today, and their scheduled inflation decision.

For the last several weeks local indexes have been posting gains largely on the expectation that Mario Draghi and the ECB will finally announce some form of stimulus for the European Economy.

Recent data has suggested that the Eurozone is recovering well yet when you look at the figures individually it could show another picture. Figures released just last week showed that the EU economy grew by just 0.2% in the first three months of 2014 and Markit's predict that if the EU continues in the same vein, it is set for between 0.4% and 0.5% growth for the second quarter of 2014, if that happens it means that Europe would have seen the best economic expansion in nearly 3 years.

Markit's PMI index for May took a slight dip, expected to be in the region of 53.9, slightly under April's 54.0 it came in at 53.5 with notable performance from Germany but a considerable contraction from France. Obviously, anything over 50 is seen as expansion yet when we see such a vast spread across the nations consideration needs to be placed on whether a true picture is being presented.

Similarly, unemployment keeps falling in the Eurozone if you look at the statistics for the whole region. Between March and April 76,000 people went back to work which helped pull the total down to 18.75m people out of work. A marginal reduction when looking at the percentages, Marches 11.8% as opposed to April's 11.7% doesn't seem a vast reduction and when you look at the disparity just in the best and worst employment markets the differences are huge. With Austria and Germany having the lowest unemployment in the Eurozone at 4.9% and 5.2% respectively, when you compare this to Spain at 25.1% and Greece at 26.5% there is still a massive amount of work to do to get the poorer performing economies back in line with their better counterparts.

What this leads to today is an ECB that is facing inflation at its lowest, and one that keeps falling. 0.5% for May is well below the 2% target. Effectively the EU is seeing its consumers hold off from spending on purchases as they generally believe that prices will continue to fall, thus far less capital is being spent on the economy.

To battle this the ECB has a couple of possible tricks up its sleeve, and hopefully we will have clarification later today that they are finally going to pull the trigger on some stimulus. With a base rate set at 0.25%, analysts believe that a further 15 points reduction, bringing the base rate down to 0.1% is on the cards. Interestingly, they are also considering bringing their deposit rate into negative territory. With a deposit rate of -0.10% they will basically be charging banks for leaving cash in their reserves over night. The idea being that the banks would rather lend more than pay the ECB interest on their funds. This along with a possible refinancing operation aimed at funding smaller businesses, thus alleviating the small business owner needing to negotiate with uptight banks.

Ultimately this whole scenario has helped the global markets and has seen plenty of value added to the indexes. Today is a huge day for Europe, and a very big day for the rest of the global investor village as although the possible measures are probably already equated into the markets, any big variation would be unsettling for the majority of local bourses, however, surprises at this level are very rare and with the current political climate in the Eurozone it is almost unfathomable that we will not see the stimulus package we have been reading about for the past weeks come to light.

The spotlight is on the ECB and Mr. Draghi. Expect a quiet day in the markets and possible profit taking before the week closes out.

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DISCLAIMER  The views, opinions, findings, and conclusions or recommendations expressed on this service are those of the author(s) and do not necessarily reflect the views of the Thungen Financial Advisors. All market data within this release is for your general information and enjoys indicative status only. Thungen Financial Advisors does not accept any responsibility for its accuracy or for any use to which it may be put. All share prices and market indexes delayed at least 15 minutes. 52 week high and low values are calculated from close price data.