Euro risk assets supported by QE2 and recovery – Danske Bank

FXStreet (Delhi) – Research Team at Danske Bank, suggests that following a tough period from spring to autumn, things are starting to look better for euro assets.

Key Quotes

“We look for the ECB to surprise markets at the 3 December meeting. We look for the ECB to revise down its core inflation forecast and in response cut interest rates and launch QE2 by raising monthly asset purchases to EUR75bn. On Thursday, ECB president Mario Draghi hinted strongly at this by saying ‘signs of a sustained turnaround in core inflation have somewhat weakened’ and ‘downside risks stemming from global growth and trade are clearly visible’.

Euro soft patch ending soon. Following a period of softness in euro data, we see signs that the euro recovery will gather pace in the first half of 2016. Real M1 growth is strong and momentum in the euro area leading indicator is bottoming out, which is normally a sign of the short-term cycle turning soon.

Global recovery to unfold. We also look for China to lead a turn in the global industrial cycle. China led the global industrial cycle lower in Q2 and Q3 this year and we expect it to lead the cycle higher in coming quarters. We look for a bottom in ISM soon as the inventory cycle will have run its course and consumer demand is still robust coming from strong housing and high real income growth.

Euro weakens on diverging monetary policy. The divergence in monetary policy will be very visible in December, with an expected Fed hike and ECB cut. This is fuelling another round of euro weakness, giving support to euro stocks.

The biggest unknown and risk factor is commodity prices. If we see a continued slide, this could fuel renewed pressure on commodity exporters. Oil prices have fallen over the past month from around USD50 per barrel to below USD45 per barrel on demand concerns. Copper prices have hit fresh lows not seen since the financial crisis in 2009.

US stocks may see less tailwind and we would expect euro stocks to outperform. Fed hikes, rising wage pressures and a stronger USD give less support to equities relative to euro risk assets.”
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