Mario Draghi is the Man of the Show

Daily Analysis - 25/01/2018

ECB meeting dominates today’s docket


The meeting comes against a backdrop of heightened speculation over when it will end its massive stimulus, and signal a rise in interest rates from record lows.

ECB meeting dominates today’s docket

The meeting comes against a backdrop of heightened speculation over when it will end its massive stimulus, and signal a rise in interest rates from record lows.

With the euro zone heading for its best economic growth in a decade, the ECB is expected to gradually shift its stance to avoid a more disruptive move later as per the central bank's December meeting minutes showed when published on January 11.

The minutes prompted the euro to surge against the dollar, extending the single currency's rally throughout the opening days of the calendar year. The euro has gained more than 2 percent since the start of 2018 as a broadening recovery bolsters expectations the ECB may be forced to unwind its policy stimulus quicker than forecast.

Also, in December’s meeting, the ECB's main benchmark rates were left unchanged.

Euro strength remains one the main challenges the central bank needs to contend with over the coming months, as a stronger currency tends to soften inflation by making exports more expensive and imports cheaper.

A more hawkish tone from Mario Draghi could be adopted in the March meeting. In December he had a dovish stand but failed to pursue investors and traders when they continued riding the bullish trend of the euro.

The ECB has long-struggled to bring up core inflation to its aim of about 2 percent and the central bank is not projected to meet its target level until 2020 at the earliest.

Late last year, the bank said headline inflation would be at 1.5 percent in 2017 and 1.2 percent in 2018. In October, the ECB announced a reduction in the level of its monthly purchases from 60 billion euros ($71 billion) to 30 billion euros. At that time, the bank also said that its quantitative easing program would stay in place until September 2018. It kept the door open to further extensions in the program, depending on the economic conditions of the euro area.


Crude Oil prices extending gains

Oil CEO warns of an upward shock in prices over the coming months, predicting $80 oil.

Speaking at the World Economic Forum (WEF) in Davos, Majid Jafar, CEO of the United Arab Emirates-based oil and natural gas producer, said prices could skyrocket over the coming months if a major producer — such as Venezuela — suffered a significant production outage.

Jafar also said we expect to see oil prices trading even towards $80 a barrel by the end of the year.

Oil prices could soon soar toward $80 a barrel amid escalating concerns over falling output from one of Latin America's biggest producers, Crescent Petroleum's chief executive told CNBC Tuesday.

"And over the next few years, because of the huge underinvestment we have had over the last few years, the concern is as global growth continues and the balance happens in the market … you could see a shock upwards in oil prices," he added.

Oil prices rose to 5 years highs, lifted by robust economic growth data as well as ongoing supply cuts by a group of exporters including OPEC and Russia.


Globalization vs America First

Trump and the US administration are happy over the optimism of an extended growth in the global economy and solid earnings.

The returns the stock market is enjoying could have the best year in a decade. A Reuter’s poll of over 500 economists showed the global economy is expected to grow at the fastest pace since 2010.

Unpredictable moves and policies of Trump and the US government administration create uncertainty and fears in the global sphere. U.S. President Donald Trump's decision to impose steep import tariffs on washing machines and solar panels earlier in the week is one example of renewed fears of protectionism.

Corporate tax cuts, the first and only legislation the Trump Administration was able to pass in the senate as of now, is encouraging repatriation of US Dollars. It adds to the factors supporting the weakening of the greenback as inflation is rising. The conclusion world leaders have pointed out at Davos is that Globalization is going through a major crisis.

At the World Economic Forum in Davos, U.S. Commerce Secretary Wilbur Ross, hinted at action against China, saying U.S. trade authorities were investigating whether there is a case for taking action over China's violations of intellectual property.

Mnuchin made a major departure from traditional U.S. currency policy on Wednesday, saying "obviously a weaker dollar is good for us as it relates to trade and opportunities." Analysts say they cannot remember any U.S. Treasury Secretary openly embracing a cheaper dollar at least in the last twenty years. On the other hand, comments could be seen as putting pressure on their trading partners to do some trade deals with the administration.

The dollar slipped to 108.74 yen, its lowest levels since mid-September.

The dollar's index against a basket of six major currencies tumbled to a three-year low of 88.816, falling 1.9 percent so far this week.

The euro topped at $1.2459, a peak not seen since December 2014, ahead of the European Central Bank's policy meeting later in the day.

The Chinese yuan also strengthened, gaining 0.5 percent to 6.3280 yuan per dollar in onshore trade, hitting its highest level since November 2015. In this month alone it rose 2.7%. Sustainable gains could mark the biggest monthly rise ever.

Trump is scheduled to speak in Davos on Thursday.


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