Finance Friday 04.03.2016

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Finance Friday

By Nikola Kedhi.

Markets entered 2016 swept by panic, constant declines and pessimism. Many analysts and investors were persistently warning of a looming recession for the world’s main economies. However, it seems that the situation is not that dire. As had been previously anticipated in this column, things are starting to stabilize and it seems that the worse has passed for now. Stock markets have been regaining much of what they lost and have surged to their best levels since the end of last year.

European stocks rose for fifth day in a row this Wednesday, with the Stoxx 600 gaining 0.6%. The S&P 500 is up 10% since its lowest levels on February 11, while global stocks have reached eight-week highs, according to the Financial Times. Furthermore, Asian stocks are currently at their highest point in two months. MSCI Asia Pacific Index went up 2.8% on Wednesday, with commodities and financial companies leading the gains. On Thursday, the longest increase since October came to a halt as Stoxx Europe 600 lost 0.2% in its opening. This was due to lower than expected earnings from Evonik Industries AG — a German industrial corporation — and a margin warning that came from Adidas AG.

According to a report made by Bloomberg, trading in European stocks reached the highest levels since 2011. In February, the number of shares traded in Europe was approximately 3.7 billion a day. This volume increase was a result of the panic that came from the losses in stocks during the months of January and February. Investors that were previously long, went short as they saw no clear signs of stimulus from the ECB.

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The recent gains in stocks were the result of several declarations and events that restored some level of confidence to investors. Oil, trading at $36.74, has reached a two month high, up considerably from the $27 price of a few weeks ago. Banks as well began to recover from their February lows. Bloomberg reported earlier this week that Citigroup Inc. added 1.7%, while lenders in the S&P 500 gained 14%. Even energy companies, which were among the worst performers last year, climbed 2.5%.

The rebound in Chinese stocks was because of the decision by the Chinese central bank to decrease the required reserve ratio by 0.5%. This means that lenders are required to keep in reserve a lower amount of money, increasing money supply and leading to an expansion of bank credit and a decline in interest rates. Naturally, expectations of more stimulus have increased since the announcement.

Since the crisis, there is a perception that whenever there is trouble on the horizon, the central banks will intervene and save the day. This is true especially in the Eurozone. Although unemployment in the euro-area fell to the lowest levels in four years in January, around 10.3%, low inflation remains an issue. It is still far from the 2% threshold and there are no signs of a surge any time soon. It is the contrary actually: the fears of a deflation are growing with every passing day. So, understandably, the pressure on Mario Draghi is high. Next week the ECB president is expected to announce further stimulus. He dissatisfied investors back in December and another disappointment would prove fatal to his credibility and to the effects it would have on the stock market. Of course, Mr. Draghi knows that — thus he will most likely deliver on his promise for further, and maybe more aggressive, expansionary measures.

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Market participants are enjoying a period of stability, albeit a fragile one. This does not mean, however, that everything will come up roses. Nevertheless, at least for now, we can expect theories of crisis and market doomsday scenarios to take some time off from the headlines.

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