Wall Street closed lower; the S&P snapped an 8-day winning streak, whilst the Dow closed down for a second straight session weighed down by lingering growth concerns as investors brace themselves for the start of earnings season later this week.
US corporate earnings are becoming a central focus. Major US banks JP Morgan Chase and Wells Fargo are to kick off first quarter earnings on Friday. Expectations for earnings season represent a significant reduction to corporate growth compared to a solid run of recent quarters. Earnings growth is expected to drop -4.3%, on revenue growth of under 5%.
Sentiment is clearly fragile, particularly following yet another global growth downgrade by the IMF; the third in just 6 months. Trump opening up another front in the trade war, this time against the EU, also weighed on sentiment. However European bourses were pointing to a cautiously higher start ahead of Super Wednesday’s risk events -the ECB monetary policy announcement, EU Brexit Summit, US Federal Reserve minutes and US inflation.
What to expect from the ECB?
The euro was holding steady at $1.1260 heading towards the ECB rate announcement, as it extends a slow recovery from $1.1183 touched at the beginning of April. Investors could be growing quietly confident that the ECB will recognize some of the improvements in recent eurozone data, notably the service sector and retail sales. Yet whilst there is a possibility that the ECB will support the euro focusing on a stabilizing in recent data, there is still plenty for the central bank to be concerned about.
Most notably Trump ramping up trade dispute rhetoric and threatening tariffs, not just on automobiles now, but also, helicopters cheese and wine. A growing threat of recession in Italy won’t escape the central bank, nor will the fact that the US – China trade dispute continues to rumble on, threatening growth in Germany and the Eurozone as a whole. Inflation concerns are returning to haunt the ECB. Despite a weaker euro and a solid rally in oil prices, inflation in the bloc is lacklustre at best and falling. Finally, Brexit isn’t going anywhere soon.
The list of concerns for the ECB is lengthy. Draghi focusing on these could see the euro pull back and test April’s low of $1.1183. However, the recent bias is to the upside, meaning that a morsel of positive news could help boost the euro back towards resistance at $1.1350.
The pound will be under the spotlight as the European Council meets to discuss an extension to Brexit. Brussels have been vocal in their support for a longer Brexit extension, expressing doubts over Theresa May’s ability to break the Brexit deadlock in Westminster before 30th June. As if on cue, talks with Jeremy Corbyn are stalling amid a lack of flexibility from May’s team. It remains to be seen how the EU votes. Sterling at these levels is not pricing in the EU rejecting an extension.