Fateful week for equity markets

Attention is focused on European Central Bank President Mario Draghi ahead of the ECB’s Governing Council meeting on Thursday. If he puts words into action, this may be precisely what the market craves.

During the past week equity markets have been poised on a knife-edge and this week’s developments may determine whether investors will send share prices up or down. Special focus is on the ECB meeting on Thursday, but also the monetary policy meetings of the ECB and the Bank of England as well as a number of important economic data are eagerly awaited.

Following a week of wide fluctuations European equity markets ended the week at zero. Weak US economic indicators sent share prices down at the beginning of the week, but equity markets staged a fairly strong rebound after ECB President Mario Draghi on Thursday pledged to do whatever is needed to save the euro. The big question is whether he will deliver at this week’s ECB meeting. If he does, it may be precisely the medicine that the markets need and with the ECB President’s announcement, market spirits are high. But with high expectations, the room for disappointment is vast. And if the meeting does not result in meaningful action, it may hit the markets hard.

There are several ways for the ECB to stimulate markets and there is no obvious option. The ECB may choose to buy government bonds from beleaguered countries, or it may offer a new long-term refinancing operation (LTRO), a cheap loan scheme for banks. Both actions will stimulate the economy and be warmly received by markets. A third option – which is vividly discussed at the moment – would be to grant the European Stability Mechanism a bank licence, which would allow the ECB to make unlimited bond purchases from debt-ridden European countries. The third option is said to be the ECB President’s personal preference.

Also economic data will be monitored closely by investors this week. The slowdown in the US economy seems to have taken hold and if this week’s economic data confirm this picture, it will fuel investors’ concerns and they will then have to look elsewhere, actually even as far away as in China, to find signs of growth. Especially the US monthly unemployment report to be presented on Friday is eagerly awaited.

Henrik Drusebjerg
Senior Strategist