The Week In Hindsight, 30 May 2014

Europe’s indices pushed higher this week, with some reaching into record territory, as traders and investors continued to bet on stimulus from the ECB next week. This was amidst a quiet period on the economic data calendar for most of the western economies, with just US second estimate GDP figures to break the week up.

Investors were further encouraged during the week as Europe’s major economies continued to stumble toward a deflationary malaisse, with German import prices and French consumer spending both shown to have fallen over the course of the previous month. In addition to this, Spanish disinflationary pressures also increased during the previous month when inflation was revealed to have fallen to 0.2% on an MoM basis.

With the slew of poorer than expected numbers coming just ahead of the ECB’s June meeting, where it is widely expected to cut all of its main interest rates as a minimum, the likelihood of action remains high. Official forecasts currently see a 15 basis point cut to the minimum bid rate as the most likely outcome from the meeting however, it is highly probable that this will come with further measures in tow.

One theory to have been mooted during the week is that the ECB will announce a UK style Funding for Lending program when it meets next Thursday, as part of a wider effort to stimulate borrowing, lending and overall economic activity.

Despite the abundance of theories, it is difficult to predict the exact course of action that the ECB will take. Markets have priced in a minor interest rate reduction at present however,  should the ECB announce additional measures such as negative deposit rates, a bond purchase program, or any other unconventional policies then volatility in European equities, fx and fixed income could increase markedly.

EU Indices