How bullish and bearish forces align for stock indexes, forex and other global markets, both technical and fundamental outlooks, likely top market movers.
The following is a partial summary of conclusions from our weekly fxempire.com fxempire.com ’ meeting about the weekly outlook for global equities, currencies, and commodity markets.
Summary
– The Big One: The ECB Rate Statement And Press Conference Thursday June 5th, Explanation, Ramifications, Scenarios
 – The Monthly US Jobs Reports And Related Leading Indicator Reports
– Other Top Potential Market Movers: Geopolitical, Scheduled, And Developing Ones To Monitor
Coming Week Market Movers: Focus On Fed, ECB Policy Related Events
The events with the most market moving potential, should they offer any surprises, are:
1.     The Big One: The ECB rate statement and press conference Thursday June 5th
Arguably this is the most important event of the year thus far, and could potentially be among the year’s most influential, profoundly effecting the Euro-zone, and hence virtually every global asset market, with currencies and bonds most directly impacted.
Markets expect the ECB will announce a new package of policy steps designed to stimulate the EU’s economy and fight off deflation threats by lowering certain key rates, easing credit, and, it is hoped, weaken the EUR and boost European exports. It’s believed that the likely package (see below) and its effects have already been priced into markets, at least the currency credit markets which pay better attention to major central bank moves.
That said, there’s plenty of room for surprises, if not in actual policy steps, then from interpretation of any comments and forward guidance given. The big question is how these comments alter the consensus about the pace and timing of future easing.
If the ECB sounds more dovish than expected, either because the current package is bolder than expected or forward guidance sounds more dovish, you’ll see the reaction fast. Current trends will get a boost- stocks and other risk assets and currencies are likely to rise, as could the USD due to weakening from its prime trading counterpart, the EUR. A European style QE is not expected at this time, but ECB President Draghi has already mentioned that it could come later. Markets will be listening for hints on that.
If the new easing package is in line with expectations, markets may not move much, although the EUR is likely to see a bounce after having sold off for weeks on the easing rumor.
If the easing package is much weaker than expected, then risk assets could sell off and the EUR would likely jump back to the upper end of its 15 week trading range.
Speculation On Scope And Extent Of ECB Easing And Ramifications
The pair’s minimal movement over the past week tells us there was little alter current expectations about the extent and scope of likely ECB easing, which continue to comprise some combination of the following:
- Suspend sterilization of its Securities Markets Program (SMP), assuming Germany has dropped its opposition to at least some degree of pure debt monetization. The ECB is almost certain to do this sooner or later for reasons we wrote about in our January special report:Â Coming 2014 Explosion: EU Money Supply or EU Itself?
- A lending rate cut:Â Currently at 75 bps and marks the top of its interest rate corridor. A lower lending rate, under current conditions, might minimize the volatility of overnight rates (EONIA).
- A re-finance rate cut: Currently at 25 bps and below the current policy setting, the ECB provides as much funds at this rate as banks want, limited only by how much acceptable collateral a bank has. The consensus is for a 10-15 bps cut. The ECB also could extend the period for which is it willing to provide unlimited funds. Although EONIA has traded above the refi rate, a lower refi rate might produce a modest reduction in overnight rates.
- A deposit rate cut. It’s currently 0%, and there is speculation that the ECB could set it at -25 bps, which would amount to a tax banks for leaving excess reserves at the ECB. This is the most controversial option because it has some secondary effects and has never been used over such a large currency area. Banks are likely to pass on the negative rates to customers, which would encourage large depositors to move funds elsewhere if they’re large enough to have that option, thus eliminating the added liquidity this option is supposed to provide by encouraging banks to lend. As we’ve noted before, coming ECB stress tests are a strong incentive for banks to retain cash or deploy it in only the most conservative ways, thus defeating the purpose of the negative deposit rate and making its costs outweigh its benefits.
- A fixed-rate offer of cheap central bank funds, often referred to as a longer-term refinancing operation. Under the LTRO, banks could borrow unlimited amounts from the central bank in the form of loans with maturities of a number of years. The exact rate could vary with a given bank’s commitment to lend the funds in specific areas.
