Market Perspective for December 1, 2014

While the historic plunge in oil prices will be a dominant market story early this week, the focus will shift to the European Central Bank’s (ECB) meeting on Thursday. ECB head Mario Draghi has indicated the central bank is prepared to take steps to boost their struggling economy, but while action has been scarce, the rhetoric has been heating up. Oil will also play a factor in the ECB meeting. Normally, everyone would welcome a drop in oil prices, but Europe’s central bank, like the Federal Reserve and Bank of Japan, has been trying to generate inflation. The eurozone’s inflation rate is hovering near zero and the drop in oil prices could push the price index back into deflation. Long story short, expectations for a bolder ECB policy are rising.

In Switzerland, voters rejected an initiative that would have forced the Swiss National Bank to increase its gold holdings, which would have effectively ended its peg to the euro. The failure of the law is bullish for the U.S. dollar because if the ECB decides on a bolder course of action, the euro will devalue and the Swiss franc will fall with it. The Swiss franc has served as a safe haven currency in the past, but without it, investors will have few options besides U.S. dollars amid a global U.S. dollar rally.

In the United States, early indications are Black Friday retail sales will be disappointing, which caused retail stocks to fall in early Monday trading. That said, a number of analysts believe changing consumption patterns are to blame for the weak estimate as more consumers are shopping online and many sales start before Friday and continue throughout the holiday season. The result being that spending is spread out over several weeks, rather than over one or two days. With a broader pickup in consumer spending recently, concerns over sales this past weekend are likely an overreaction.

In addition to Black Friday results, a number of companies in the retail sector will announce earnings results this week, including American Eagle (AEO), Sears (SHLD), Abercrombie & Fitch (ANF), Aeropostale (ARO) and Dollar General (DG).

Global economic data will also be in the spotlight as November manufacturing is released. China’s PMI came out late Sunday night and it showed the manufacturing sector slowed again, although growth remains positive. European PMIs are out on Wednesday, as are producer prices. Any negative shift in the data will increase expectations for ECB action. U.S. manufacturing data will also be out this week.

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