HomeContributorsFundamental AnalysisCAC Ticks Higher as Investors on Sidelines Ahead of ECB Decision

CAC Ticks Higher as Investors on Sidelines Ahead of ECB Decision

The CAC index continues to have a quiet week. Currently, the index is at 5,094.30, up 0.15% on the day. On the release front, German Factory Orders dropped 0.7%, well off the forecast of a 0.2% gain. Eurozone Retail PMI edged lower to 50.8 points. On Thursday, the ECB holds a policy meeting and will release a rate statement, followed by a press conference with ECB President Mario Draghi. As well, France publishes Trade Balance and the eurozone releases Revised GDP.

The streaking euro remains close to the symbolic 1.20 level, and has gained 13% against the dollar in 2017, with two main reasons for the appreciation. First, economic growth has rebounded this year, led by robust growth in Germany. Second, there is increasing speculation that the ECB will taper its asset purchase program (QE), which is scheduled to terminate in December. The ECB is yet to decide what to do next, and analysts do not the details of the new program to be announced until October or possibly December. ECB policymakers must weigh competing interests – Germany would like nothing more than the ECB to simply exit the program, which was brought in as an emergency measure to begin with. However, France and other eurozone members, which are not enjoying German-style growth, favor a gradual tapering of the program, perhaps lowering monthly asset purchases from EUR 60 billion to EUR 45 billion. The stronger euro is equivalent to a raise in interest rates and has resulted in monetary tightening, so the ECB may favor a slow exit. Aside from the headache of a stronger euro, ECB policymakers must wrestle with the dilemma of a stronger economy that remains gripped by very low inflation. Will the ECB address these concerns at the Thursday meeting? Any hints about a change in monetary policy could have a sharp impact on European stock markets.

Britain’s departure from the European Union promises to have a significant impact on the Eurozone financial sector, and stock markets will also be affected. One issue under discussion relates to clearing houses based in Britain, specifically over euro-denominated trades. The European Commission is working on a draft law that would see joint supervision between the EU and Britain over such transactions, but France wants the European Securities and Markets Authority (ESMA) to have greater authority, such as a veto, over these transactions. This is one more example of the immense difficulty in untangling the British financial sector from the continent, and there will likely be intense wrangling between the two sides at the Brexit negotiations. as Britain tries to minimize the damage to London, which is set to lose its status as the premier financial hub in Europe.

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