Equity markets experienced a mixed start of the week, with US stocks closing moderately lower on Tuesday and European equities opening higher today, but dropping in negative territory within the first two hours of trading. In Asia, Chinese stocks had another bad day, with the Shanghai Composite Index closing over 3% down and Hong Kong reference equity index losing about four tens of a percentage. In contrast, Japan’s Nikkei 225 posted a resilient session, closing 1.91% higher.
Europe is back in the spotlight, with investors focusing their attention on the ECB and its two days meeting starting today in Malta. The meeting takes particular importance as President Mario Draghi is increasingly under pressure to implement actions that would match its words to “do whatever it takes” to support Eurozone’s inflation and economic activities. Market participants are increasingly questioning the ability of the European Central Bank to follow through on its previous statements regarding its willingness to extend and/or increase the current QE program, if economic conditions were to require it.
And here is the major issue, as the Eurozone’s economies seem to desperately need more stimulus, the Central Bank seems to still be reluctant to act. As European inflation is stubbornly refusing to accelerate, lead economic indicators are still below expectations and the Euro has started to appreciate, reducing the beneficial easing effect of the ECB’s bonds purchasing program, what can the ECB do?
The easiest solution for Mario Draghi would be to expand the ECB’s QE program and to extend its implementation beyond the initial September 2016 term, however, this would require political support and legal amendments, which are likely to sensibly limit the concrete actions the Central Bank can take. In fact, any meaningful extension of the EUR 60 billion monthly purchasing target, and the waving of restrictions on the bonds’ types, risk, country of origin and maximum exposure the ECB is allowed to invest in, will be only approved after an extended and probably controversial discussion within the ECB Governing Council. And here the problems start, asGermany, the largest contributor to the ECB balance sheet and most QE’s skeptic member, is not likely to agree to give the Central Bank a “blank cheque”.
With the pressure mounting on Mario Draghi to act, and the need for him to navigate complex political and regulatory obstacles, investors will be closely watching the results coming out of this week meeting, looking for hints on whether the ECB will be able to continue to support Eurozone’s economic and inflation growth with more stimulus, or if politics will draw a line in the sand, closing the path for any further monetary easing.
While the ECB is busy in Malta, Credit Suisse, the second largest Swiss bank, announced a major shift in strategy, aimed at increasing profitability and reduce costs. The Swiss bank has announced that it intends to raise as much as CHF 6.05 billion in new capital as part of a broader reorganization intended to refocus its business on Switzerland and expand its Wealth Management unit in Asia, while continuing to scale back its securities unit. This was the latest step undertaken by the bank to improve its performance and profitability after having significantly underperformed the majority of its peers over the past 12-18 months. Shares in Credit Suisse dropped nearly 5.5% today, before pairing some losses, trading about 3% down during the late morning session.
This article was issued by Paolo Zonno, Trader/ Analystat Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.