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What to expect in the markets in 2018 as a result of ECB's actions
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Loading...Economic growth in the Eurozone returns, with the prospect of several stable years of development. The steady pace of improving economic indicators in European countries shows signs of the so-long expected rise in prices and inflation rate of the Union. As a result, the ECB has decided to adjust the monetary policy and since January 2018 the monthly volume of incentives will be cut to half and the duration of the program has been extended until the end of September 2018.The ECB signaled that they were leaving the possibility of extending the program, as well as a possible increase in purchases. As a result of Mario Draghi's dovish tone, and comments that inflation remains under serious surveillance it has led to significant euro sales. Before the regulators meeting, the common currency enjoyed wide popularity and was appreciated considerably against all other currencies.
However, I am of the opinion that once the current EURUSD adjustment is over (as in other euro currencies), markets will start to re-accumulate positive indicators and the current upward trend of the European Union's economy, which will return speculation back on the agenda for the upcoming cycle of interest rate rises from the ECB. I expect next year inflation to exceed the 1.2% projected by the ECB, which will affect currency markets by overcoming the psychological level of 1.20 at EURUSD and rising to 1.22 against the US dollar. Also, Bundesbank Jens Weidman, the governor of Germany's central bank, is a longtime critic of the program of quantitative easing, and he is of the opinion that the ECB should set a clear end to the asset purchase as the gap between economic growth and its potential is rapidly shrinking. He is considered to be one of the potential candidates for Mario Draghi's post, and his comments will provide additional support for Euro Bulls. The current EURUSD adjustment can continue to levels 1.12-1.13 only if the strong support zone at 1.15 is overcome. This may happen in the coming days and weeks if the US succeeds in pushing President Trump's tax reform, as well as the imminent rise in the US interest rate.
If we take a look at the Commitments of Traders Report (COT Report), despite the slight overhang of short positions, we see a clear trend of stable longs growth and rising interest in the common currency.
The low price of the combined currency has had a positive impact on the European economy and companies, especially on export-oriented ones, which also has a positive impact on the stock market. The economy of the eurozone accounts for the 18th consecutive quarter of growth, the best series since the financial crisis. At the end of the program, this will result in the suspension of fresh money in the companies and the stock market, and the appreciation of the euro, which will negatively affect for a short period of time, and I expect to see a natural adjustment of around 7-8% of major indices such as DAX (up to levels around 12200-12400), CAC, and so on. Then the upward trend of the stock markets will continue to new peaks, as it is possible growth in 2018 to exceed 15% / DAX to overcome 14,000 and move to the psychological level to 15,000 /. Despite the termination of the program, the money provided by the ECB will continue to circulate in the economy, and while the bank's balance sheets remain volatile and the excessively low interest rates, investors will continue to invest in shares as the best risk-benefit option.
Speculations and expectations for a change in the ECB's monetary policy course from loose to tightening - upcoming interest rate rises will have the most positive impact on the banking sector in Europe, with growth likely to exceed 25% by the end of next year. Part of the negative interest rate on commercial banks' deposits with the ECB can not be passed on to customers, which is reflected in their weak earnings. Draghie countered bankers' complaints, calling for cost reductions instead of accusations of the Central Bank policy, and called for joint efforts by regulators, supervisors and national authorities to fight bad credit. In general, raising the base interest rate will also lead to higher interest rates for commercial banks and higher profits, respectively. At the other end, the export sector remains, with a strong euro impacting on the competitiveness and profits of companies exporting goods and services outside the European Union.
Generally, the launch of the interest rate cycle at a later stage in 2019 will begin to have a direct effect on the housing sector. Raising the key interest rate in Europe will also directly affect higher interest rates on loans. Expensive loans will lower demand for property, which will shape a new trend of falling prices, as well as a negative impact on the construction sector both in Europe and Bulgaria.
As for the Bulgarian stock market, the ECB's policy has little impact since the central bank does not buy Bulgarian government bonds as a result of the change in the rate, no significant increase in interest rates on government securities is expected. The forecast for the next year remains optimistic, mainly because of the potential to attract fresh investment capital after the Exchange Traded Fund (ETF) on SOFIX received registration from the German BaFin regulator for public offering of units in Germany and in the process of registering the instrument for trading on the Frankfurt Stock Exchange. Also, at the beginning of the year, the ETF was registered with the UK Financial Regulator Financial Conduct Authority (FCA) for marketing in the UK, and the listing procedure is currently underway at the London Stock Exchange. Offering the index fund of the two largest stock exchanges in Europe will significantly facilitate access and investment in the Bulgarian Stock Exchange, which will increase the interest of the Bulgarian companies and will increase the liquidity of trading in Bulgarian stocks. This, in turn, is likely to create an avalanche effect as, as a result of tightening the policy of the ECB, many investors will seek a higher return than the European stock market average and will look to emerging markets where the potential for Higher profits are higher. This is supported by government policy and actions as well as good economic indicators, sustainable growth of the economy and strict fiscal policy of Bulgaria in recent years. The attracted foreign investors' capital will force the ETF to buy shares from the BSE, as it is an index fund to maintain the ratio against the Bulgarian main index, which means that the most significant growth will be given to the companies in the SOFIX.
Head of Trading D. Kalapov
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