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The ECB takes definitive action to inflate economy! Will the rest of the world consider doing the same?

by , 06 June 2014

It's been a rather eventful week. The highlight of which, was the ECB's rate announcement and subsequent speech. This after it decided to instate negative interest rates to prevent the eurozone from sliding into deflation.

It was so eventful, in fact, that the normally dominant US Non-Farm Payroll number was pushed into second place.

In local news, the new mining minister met with unions and mines to put an end to the months long strike that pushed South Africa's Q1 GDP into negative territory.

Let's have a look at these three big events and see what the new week has in store for the stock market…
 

The ECB announcement took centre stage in this week’s stock market headlines 

Despite how influential it was, the market anticipated the ECB’s actions , especially after inflation figures for the eurozone came in lower than expected. 
 
This because the ECB had previously promise to fight any possibility of inflation and had the Bank not acted the market would have reacted quite negatively. 
 
The majority of analysts expected even the fact that it dropped the deposit rate to -0.1% - despite the fact that this is the first time a major central bank has ever done this.
 
It’s now hoped that European banks will rather lend theory and earn interest rather than keep at the ECB and pay interest. 
 
This said, the ECB’s moves aren’t entirely without precedent. The Danish have done something similar although the outcome wasn’t significant. There were no major negative consequence, but it also didn’t cause a large jump in lending. 

The ECB’s move shadowed non-farm payroll figures

US Non-Farm Payroll results came in stronger than expected, but only by 2,000 jobs. This shows that the US remains in recovery, although the pace of growth is below what many policy makers hope for. Among the major economies, only China is doing better. 

Going into a new week, here’s the stock markets news you need to pay attention to…

Next week, well see relatively few economic numbers out of South Africa, but there is a key release at the end of the week. 
 
Our credit ratings are due to be released and things don’t look promising. 
 
Given the unexpected drop in GDP as well as the continuing labour unrest, not to mention new strikes in the sugar and metal sectors, it’s likely that the South Africa economy will face yet another set of downgrades. 
 
This is especially significant given how close the country is to losing its investment grade rating. 
 
Though it’s not in danger this time around , we’re only just above the threshold at the moment. 
 
If we lose this rating, many institutions may become forced sellers of our debt as they can’t hold non-investment grade bonds.
 
Further afield, the US is set to release retail sales figures next week. The US consumer remains the biggest driving force in the global economy and a negative surprise would push markets lower. I personally expect to see an uptick for US retail numbers for most of this year. The Fed  has made it pretty clear that we should expect rate to rise by the second half of next year and this is will prompt consumers to spend more now to take advantage of low rates while they can.
 
China will also release Retail numbers this weak and expectations are for strong growth. This fits well into its government’s plans to increase consumptions as a share of the economy. 
 
So keep an eye on these stories as they come to light next week. 

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The ECB takes definitive action to inflate economy! Will the rest of the world consider doing the same?
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