Eyes on eurozone inflation data, ECB meet on Jan 22: StanC

Ekta: What are your expectations from the Eurozone data that is out today that is the inflation data as well as the unemployment data. How critical is it for the European Central Bank (ECB) to decide what they will do on 22nd January?

A: It is reasonably critical. We are looking for inflation to show a negative trend for December and that would bring it to its lowest level and with the first decline that we have seen really since the start of the financial crisis in 2009 and unemployment rate will stay unchanged at 11.5 percent. So, the focus is very much on inflation and this potential move to negative inflation. Of course oil prices continue to fall. So, even if we don’t get a negative trend for December it is inevitably going to think negative in the January-March data and the question remains will the ECB embark on sovereign quantitative easing (QE) when they meet on January 22.

Reema: The big fall in the global markets over the last two or three days has spooked us even here. Are you bearish on the equity markets in the Eurozone now and how much could the downside be?

A: We have seen very sharp moves in markets globally in the last few weeks and certainly since the start of the New Year but it is important to stand back and look at what is happening, what the prospects are in an environment of low oil prices. It does mean that we will see ultra easy monetary policy for a long time. Low oil prices of course acts as quite a strong stimulus to activity and we have to remember that there are many German businesses that have been complaining about high energy costs. So this in a sense gives a bit of lift and quite a good stimulus.

So in this environment the outlook ought to be a little bit better for growth and therefore ought to be better for stocks as well. So the current volatility really reflects the speed of the moves that we have seen in the last few weeks rather than anything sort of more fundamentally wrong with the outlook for the economy.

Ekta: Considering the lower oil prices that we are working with will there be any sort of impact in terms of sovereign funds that benefit from oil prices or higher oil prices. Will there be any sort of portfolio allocation change, redemption of funds from certain of their portfolios simply because of lower oil prices and what the impact on the economy could be?

A: We have already seen some shifting in those funds away from commodities and we are continuing to see fixed income doing well. We have seen extremely strong moves in a very short phase of time. When that happens that makes me rather nervous so we could see a sort of rebound in an equally short space of time.

The oil price outlook is dependent upon supply and to the extent that the supply starts to be constrained at these low levels you would expect that maybe a market clearing rate for oil prices will be a little bit higher. So, all investors need to be cautious about a potential for the bounce back in some of the steep market moves that we have seen recently.