Central Banks Hold The Key This Week

The week ahead is going to be very central bank focused with Mario Draghi, President of the European Central Bank, speaking today, the Bank of Japan making its latest monetary policy decision in the early hours of Tuesday morning, the minutes from this month’s Bank of England meeting coming Wednesday followed by the latest decision from the Federal Reserve, as well as its economic projections, and finally the Swiss National Bank’s latest announcement on Thursday.

The one that stands out from all of these which may impact trading sentiment in the first half of the week must be the Fed decision on Wednesday. Interest rates are widely expected to be lifted off their record lows for the first time since October 2008 this summer and investors are extremely nervous about this.

While this may seem odd given that this typically signifies a thriving economy that needs to be managed so as to avoid inflation getting out of control, in an environment where investors have become hooked on central bank stimulus, it means something very different. It means that the yields that are now on offer are less attractive and in order for them to become so once again, corporate America must up its game and unfortunately, this is not expected to happen. With bond yields at staggeringly low levels, there isn’t much room to manoeuvre here either which is why many fear that this first hike marks the end of the bull run.

On Wednesday we’re expecting the Fed to remove “patient” from its statement, suggesting that the rate hike is imminent. The latest economic projections could add to this view if that Fed appears to be more upbeat on growth and inflation.

Another central bank looking to raise interest rates is the BoE and the minutes from its meeting two weeks ago will also be released on Wednesday. The UK is expected to fall into deflation in the coming months but that isn’t worrying Governor Mark Carney or the MPC as they believe it’s being driven by temporary positive factors such as falling oil and food prices.

As a result, a rate hike this year is still on the cards. Released alongside the minutes will be the latest vote on interest rates and I would not be surprised to see a couple of votes in favour already, most likely from Ian McCafferty and Martin Weale, two of the more hawkish members of the MPC.

At the other end of the spectrum we have the ECB, which only this month began its first ever quantitative easing program as deflation took hold in the eurozone. Given that this only recently began, you would think Draghi’s comments may not have the impact they would have a few months ago but all you have to do is look at the tumbling euro to see that is not the case. This evening he will speak at the SZ Finance Day 2015 on the future of the finance industry. As always this is likely to lead to questions about the ECBs QE program and therefore has great potential to move markets, especially if the news is not great as the euro sell-off has arguably been overdone.

On the data side, both today and the week as a whole is looking a little quiet. There is data being released but very little of that is tier one data that investors really pay attention to. US empire state manufacturing index and industrial production may offer something this afternoon but I expect any reaction will be fairly muted, especially with such a big announcement to come Wednesday.

The FTSE is expected to open 30 points higher, the CAC 28 points higher and the DAX 69 points higher.

For a look at all of today’s economic events, check out our economic calendar.

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