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Hope for the Best, But Be Prepared for the Worst

Hope for the Best, But Be Prepared for the Worst
(Dollar Photo Club)

Friday, 22 January 2016 06:51 AM Current | Bio | Archive

During the press conference that followed the ECB’s decision to leave its key interest rates unchanged, ECB President Mario Draghi gave interesting and specific “forward” guidance of what can be expected at the next ECB Governing Council rate decision meeting in March.

“As we start the new year, downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks," he said.

"In this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018 … we will confirm our determination to continue to comply with our mandate, which is to reach a level of inflation that is below but close to 2%, even – and actually even more so – in the face of adverse developments."

In simple words, the ECB will further extend its monetary easing undertaking in March with literally all it has at its disposal.

During Draghi’s press conference, the euro dipped immediately against the dollar in the lower $1.08 per euro zone.

Interestingly, Goldman Sachs revised already its euro forecast to 95 U.S. cents in the next 12 months. They see the euro to weaken to $1.04, $1 and 95 cents per euro in three, six and 12 months. Of course, if that were to occur, that wouldn’t displease Draghi at all, but we aren’t there yet…

Besides that he commented on China: “There have been at least three main developments in recent weeks in China," he said, citing:
  • The first was a PMI which was weaker than expected;
  • the second was the overall situation in the forex market;
  • the third was the situation in the stock market.
  • All this generated sizeable capital outflows.
Draghi is right. Investors should lose confidence for much less than that and the problem is the worst has yet to come because the so-called re-balancing of the Chinese economy will first have to come to grip with the huge debt the country has accumulated since 2007.

Besides all that, today at the World Economic Forum in Davos Switzerland, Draghi made an interesting remark saying the Fed rate hike in December was “appropriate.”

Anyway, where we go from here with the Fed from remains still an open question as markets now expect only one, at best two, rate hikes this year.

I don’t think it’s not an overstatement to say investors are facing extremely confusing times where dangerous potholes are lurking beneath the surface on the road forwards.
In my opinion, one thing is for sure: Volatility spikes in the VIX that could reach the same levels at around the 80 points levels, as we have seen in 2008 are fully in the cards and in case we reach these levels, will cause real havoc in many markets all over the globe.

Hope for the best, but be prepared for the worst, that's all I can wish every investor.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Hope for the best, but be prepared for the worst, that's all I can wish every investor.
investor, economy, stocks, ecb
Friday, 22 January 2016 06:51 AM
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