Jan 19, 2015

    Investors, brace yourselves as ECB meets

    INVESTORS can expect more market turbulence over the next few days, courtesy of central bankers.

    However, a small rebound in oil prices and upbeat economic data from the United States on Friday could give equities a boost today.

    The Swiss National Bank stole the show on Thursday with its shock decision to ditch its cap on the franc against the euro, which threw global markets into turmoil. The Straits Times Index lost its gains for the week to end at 3,300.68 on Friday.

    However, the spotlight this week will be firmly on the European Central Bank (ECB).

    Expectations are running high that the ECB will unveil a massive monetary stimulus, often called "quantitative easing" or "QE" for short, some time this week. The bank is scheduled for a policy meeting on Thursday.

    A major round of QE in the euro zone will drive the euro lower and spark more volatility in markets, as traders reassess their positions.

    However, markets will be closely watching the size of the expected stimulus, and will likely be disappointed if it is too small.

    "ECB QE could be five times less efficient than in the US. Hence, for inflation to reach close to a 2 per cent threshold medium term, the potential amount of asset purchases needed is 2 to 3 trillion euros (S$3 trillion to S$4.6 trilllin), not a mere 1 trillion euros," said Societe Generale analyst Michel Martinez in a note.

    Another thing weighing on investors' minds will be the outcome of a snap general election in Greece on Sunday, which could determine whether Greece exits the euro zone and, ultimately, whether the entire single-currency union can remain intact.

    The International Monetary Fund (IMF) is also due to release its global economic growth forecasts tomorrow, which analysts expect will be fairly gloomy.

    "The IMF is now likely to cut its projections for this year to around 3.5 per cent, to take account of the weakness of the euro zone, Japan, Russia and Brazil during the second half of last year," Capital Economics said in a note.

    The World Bank last week cut its forecast for global economic growth to 3 per cent this year, from an earlier forecast of a 3.4 per cent expansion.

    Still, investors may be cheered this week by a small rebound in crude oil prices on Friday and signs that the US economy is on track for a solid recovery.

    Wall Street rallied on Friday as consumer sentiment in the US for this month hit an 11-year high, which gave a fillip to crude oil prices.

    US consumer prices also recorded their biggest drop in six years, due to cheaper petrol in the world's biggest economy, while a gauge of core inflation remained flat, raising hopes that the Federal Reserve may delay its planned interest rate hike.

    "Weakening core inflation will make it hard for the Fed to justify a mid-year rate hike, suggesting it will be delayed into the second half," AMP Capital chief economist Shane Oliver said in a report.

    This "gradual tightening cycle" in the US, plus further monetary easing expected in Europe, Japan, China and Australia, mean that share markets may still see reasonable returns this year, he added.