Why the European Stock Markets Could Have a Volatile JanuaryBy twocents@thestreet (Antonia Oprita) NEW YORK (TheStreet) -- Europe is starting off the New Year with a bit more turmoil than usual. Normally, the European Central Bank would kick off the year with a monetary policy meeting and news conference this coming Thursday. Must Read: Buy TheseBy twocents@thestreet (Antonia Oprita) NEW YORK (TheStreet) -- Europe is starting off the New Year with a bit more turmoil than usual. Normally, the European Central Bank would kick off the year with a monetary policy meeting and news conference this coming Thursday. Must Read: Buy These 5 Dogs of the Dow for Gains in the New Year But the ECB has changed its schedule, opting for less frequent monetary policy meetings. Its first of the year will take place on Jan. 22. Despite having been announced for a long time, this change in the schedule could still, due to particular circumstances this month, result in increased market volatility. ECB President Mario Draghi hinted again, in a newspaper interview, that the bank may soon start to buy government bonds in order to fight the threat of deflation in the eurozone. With this, Draghi managed to send the euro to the lowest level in four and a half years against the dollar. But on Jan. 14, the European Court of Justice (ECJ) in Luxembourg will issue an opinion on the legality of the Outright Monetary Transactions - a program to buy sovereign bonds that the ECB never actually used, but which followed Draghis promise in 2012 to do whatever it takes to save the euro. Last year, German constitutional court judges ruled that the ECB was exceeding its mandate if it bought sovereign bonds, but left the final decision to the ECJ, the European Unions highest court. The upcoming decision could put paid to the ECBs quantitative easing plans if it upholds the German opinion that buying bonds exceeds the central banks mandate. The sector that would suffer most in such a scenario is the European financial sector. In his Real Money Pro diary, Doug Kass asked a very good question last week: did the recent European bank stress tests take into account the risk of deflation? This question is particularly important because this year some investors hope to see a bit of a revival in European banks after slumping in the latter half of 2014. The STOXX Europe 600 Banks index fell by 3.5% in the past six months and lost 3.3% of its value in the past month alone. The Nasdaq-listed iShares MSCI Europe Financials ETF (EUFN) lost nearly 13% in the past six months -- although some of that may be due to the euros depreciation against the dollar. Must Read: Buying Eurozone Stocks? Be Pepared for Some Good News for Once The negative returns have come at a time when the ECB has become the single supervisor of the eurozones biggest banks and despite rigorous stress tests that were carried out to identify potential trouble and which gave a clean bill of health to most banks. So this means that investors are still afraid of skeletons in banks closets -- and not properly accounting for the danger of deflation could be one of them. According to the European Banking Authoritys stress test methodology, deflation was, to some extent, taken into consideration. The worst case scenario shows annual inflation in the eurozone at 1% in 2014 and then falling to 0.6% in 2015 and to 0.3% in 2016 (the more lenient baseline scenario assumes inflation would pick up to 1.3% in 2015 and to 1.5% in 2016.) Sadly, if we look at the current conditions, the worst-case scenario seems to be playing out already -- at least in the case of inflation. The eurozones November inflation was at 0.3%, so chances are it will end 2014 much lower than the EBA had assumed. Jan. 14 could turn out to be one of the most important dates in the New Years calendar. If the ECJ rules against quantitative easing, deflation in the eurozone could become entrenched - and this in turn could put pressure on debtors and, ultimately, on banks. Antonia Oprita is a freelance editor and columnist for Real Money. Must Read: Behind Russias Current Crisis: Its Not the Ruble, Its Putin ift.tt/1gB4pon
Posted on: Mon, 05 Jan 2015 11:54:23 +0000
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