Impact of stimulus on the markets

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The world market saw steadying of oil prices after the gains they made over the last week. Crude saw its price above $90/barrel on Monday as there is a renewed belief in the stimulus expected to be announced in the US while there is still an impact from the euro debt crisis. Any breakout in the oil market is being kept in check by the pressures that are being sustained on the system by the crisis. Investors and speculators are keeping an eye on both matters. The market is seeing cautious recovery and gains as there is news of stimulus from both European Central Bank and the Fed in the coming days.

As there is no certainty about when and if any stimulus will take place, investors are ready to carry out profit taking and short term gains for a while. There is a two way pressure on the oil market to grow at this point of time. Economic data is constantly showing that there is a slowdown underway in the US which has a downward effect on the oil market. However, more and more disappointing news with regards to the economy will push the Fed closer to take some action.

The recent data to support this concern was the cut down in growth expectations released by the White House. It would make any stimulus more and more inevitable leading to gain in oil prices that are expecting the economy to rebound. There is also a renewed belief on the European front as the rhetoric coming from Germany and France seems to be consolidating the statement that everything would be done to protect euro in the future.

Equity

Equity markets have also enjoyed gains in recent times as announcement about a stimulus package is looking more imminent. Monday saw Nikkei rising to one week high backed by the expected announcements. Friday saw the US and European equities rebound from a slump while the after effects can be seen today (Monday) on the Asian markets as well. This week ECB and the Fed are expected to hold their policy meetings and all markets expect a positive result leading to further gains respectively.

The turnaround has been taking place since last week when Mario Draghi, ECB President, vowed that he would do everything in his power to save the currency. This provided investors all around the world with a safeguard against the future of the euro and the eurozone debt crisis. The meetings are expected on Tuesday and Wednesday by the Fed where there are calls to do more. The meeting on Thursday by the ECB is expected to address the burning issue regarding Spain and Greece.

Bond markets

The last but certainly not the least is the bond market which is showing signs of stability as the Fed is expected to carry out the required actions. There were fears that economic slowdown would lead to deflation and a fall in yields and interest rates would ensue, however, signs show that there is a low risk of deflation. There are expectations that Consumer Price Indexes are expected to go up in the future which shows that there are measures being put in place to avoid the chronic stagflation and deflation that has marred Japan. When similar quantitative easing was carried out in 2008 and 2010, commodity prices saw a surge which meant deflation is off the radar for many of the market participants.

However, the headaches of the Fed are not over yet just because there seems to be no deflation. There are concerns that this might actually lead to inflation which can also prove to be a burden on the economy. A rise in commodity prices hits the economy harder as much of the raw material becomes expensive. This year, there would be additional pressure due to the drought in the corn crop which will lead to further inflation mainly in the food and dairy sector. If the prices of other commodities spill over into this sector, it could mean that expected inflation figures would be surpassed. At this point, the inflation figures seem to be well within the range.

Zain Naeem is the head of equity research at Maan Securities (Pvt) Ltd. He is a Lahore-based commentator with more than 3 years of experience in trading and research at the Karachi Stock Exchange and Lahore Stock Exchange. He enjoys writing and commenting on the finance front and presenting it to various audiences in different forums. Zain is deeply interested in politics, business and finance and is fascinated at how the three intermingle with each other.

The views expressed in this article are the author’s own and do not necessarily reflect Arabian Gazette’s editorial policy.

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