03 December 2013
Sales Trader, Client Trading Services, Saxo Capital Markets
After punching out record highs in October, the DAX could be set for further gains this week as market participants turn their attention to Mario Draghi and the European Central Bank's (ECB) monetary policy meeting this Thursday.
After punching out record highs in October, the DAX could be set for further gains this week as market participants turn their attention to Mario Draghi and the European Central Bank's (ECB) monetary policy meeting this Thursday. With deflation a growing concern for Europe's central bankers, a more dovish approach from the ECB could be on the cards. Speculation that the bank will add more stimulus initially sent European stocks higher on Monday morning, though the DAX eased 0.4 per cent to trade at 9,002.80. However this remains within touching distance of October's record high of 9,065.30 hit last week, when the index broke the 9,000 barrier for the first time.
Unemployment is ticking higher, while the latest consumer price index for the Eurozone showed an annual increase of only 0.7 per cent, well short of the ECB's target of two per cent. With inflation at a four-year low, investors are primed for more decisive action by the ECB.
So far Draghi has been cool on deflationary pressures, but even he may think it is time to act. Expectations are mounting that the ECB will unleash a looser monetary policy, which could spur the DAX and other European equities even higher. However, the bank has been uneasy about easing policy in the past and even if it does opt for more stimulus, it is far from certain what form this would take.
Action or inaction?
However, Draghi may simply wait for the nascent recovery to lead price growth in the bloc. The ECB chief has held his nerve on deflation so far and it's hard to see why he would change tack now. Business confidence increased for a sixth month in October to the highest level in more than two years, while manufacturing and services output has expanded since July.
Indeed for some the low price growth is a positive. At a recent press conference Draghi even suggested that "with low inflation you can buy more stuff". There have been suggestions that low inflation is due to weak price pressure in countries like Greece and Spain, indicating that companies are using the drop in unit-labour costs to improve competitiveness.
Actual policy changes may not be required, however; market participants will closely watch for a change in tone from the ECB and in particular any signs of a shift in the arch-conservatism of the Bundesbank.