European indices lower ahead of ECJ ruling on OMTs

European indices lower ahead of ECJ ruling on OMTs

By Craig Erlam on Jan 15, 2015 08:03:01 GMT

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  • Europe seen lower as lower oil prices continue to weigh;
  • World Bank revises down growth for 2015 and 2016;
  • ECJ to give verdict on OMTs, potentially paving the way for QE this month.

The continued decline in oil prices is putting further strain on indices ahead of the European open on Wednesday, even as the ECB draws up plans for its widely-anticipated bond-buying program which is expected to be announced next week.

Quite often, central bank stimulus will trump most other things in the eyes of investors, with more market liquidity meaning stocks must go up and bond yields must come down. Or at least, that has been the lesson from the last six years or so. It seems however that quantitative easing has met its match in falling oil prices, with energy companies weighing heavily on any gains being made on QE expectations.

The lower open expected in Europe has not been helped by the World Bank’s new global growth forecasts for this year and next, both of which were revised lower. While the bank warned against relying on the US economy to drive global growth, it did highlight the opportunity that lower oil prices represent for oil-importing nations including China and India. Exporters of oil are expected to suffer quite considerably – especially Russia, which is also battling against economic sanctions imposed by the West for its involvement in Ukraine, which is why the country is seen contracting by 2.9% this year.

The World Bank also highlighted some potential banana skins for the coming years, although none of these come as any surprise having been discussed heavily by analysts and economists everywhere. Higher borrowing costs in developing countries as a result of financial market volatility was top of the list, which also included setbacks in global trade if the eurozone or Japan falls into a prolonged period of stagnation or deflation and Chinese debt levels.

The European Court of Justice will this morning announce its decision on the legality of the Outright Monetary Transactions (OMTs) which was introduced as a backstop by the ECB but has never been tapped. The introduction of this as a backstop was a massive turning point for the eurozone and the fact that it was never used suggests it never will be and therefore, with regards to the OMT itself, today’s ruling doesn’t really matter. Not to mention the fact that it is non-binding and therefore the ECB could still, if it wants to, utilise the facility if it ever wished. However, if the ECJ deemed it to be outside of the ECBs remit, you can only imagine they would accept its decision.

With that in mind, this morning’s ruling is being viewed as the red or green light for the ECB to announce a bond-buying program which some have claimed, like the OMT, would be illegal. Given that both involve the purchase of government debt in the secondary market, this ruling effectively decides whether it constitutes government funding or not and therefore falls within or outside the central bank’s remit. Given how much QE has now been priced in, it will be very interesting to see how the markets react to the ruling. If it’s bad news for Mario Draghi, we could see some extreme volatility in the markets.

The FTSE is expected to open 84 points down, the CAC 72 points lower and the DAX 150 points lower.

About Craig Erlam

Craig Erlam is Market Analyst at Alpari UK. He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter, Google+ and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.

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