Market Perspective for January 19, 2015

This week kicked off with a bang in Asia and it will close with a bang in Greece.

On Monday, the mainland stock market in China plunged 7.70 percent. At one point, the stock market futures in China had tumbled 10 percent, the one day limit for stock prices to move in China. The slide in shares was sparked by a three-month ban on new margin accounts at three large brokerage firms due to regulatory violations.

China’s rally in 2014 was fueled by growing leverage and with the limitations, demand for shares slumped. Many A-shares of Chinese financial companies fell by the 10 percent limit on Monday, but in no-limit Hong Kong, the H-shares of the same firms lost another 5 to 10 percent. Chinese ETFs that hold H-shares, such as iShares FTSE/Xinhua China 25 (FXI), will likely open lower on Tuesday if a rebound does not occur overnight.

European stocks ignored the drop in China as investors are focused on the European Central Bank’s (ECB) Thursday meeting. According to a Bloomberg survey of economists, 93 percent of respondents believe the ECB will announce a 550 billion euro quantitative easing (QE) program. Rumors of the plan surfaced after a meeting between ECB President Mario Draghi and German Chancellor Angela Merkel on Wednesday last week. The latest rumored details say the program will be carried out by national central banks purchasing their own securities, to make it more palatable to opponents such as Germany.

Whatever the result, Thursday and Friday could be big days in the currency market. Speculators and investors have largely priced in QE by selling the euro ahead of the meeting. Simply meeting their expectations may be enough to spark a short-term rally in the euro as traders close their positions.

Europe won’t rest following the ECB meeting. On Sunday, Greece elects a new parliament. The anti-austerity Syriza party has held its narrow lead in the polls event though the race has tightened.

In the United States, stocks are on a holiday shortened week due to Martin Luther King Day. Nevertheless, it will be an eventful week of earnings reports. International Business Machines (IBM), Baker Hughes (BHI), Halliburton (HAL), Netflix (NFLX), Ebay (EBAY), Starbucks (SBUX), McDonald’s (MCD), General Electric (GE), Verizon (VZ), Delta (DAL), Johnson & Johnson (JNJ), Morgan Stanley (MS), American Express (AXP), Sandisk (SNDK), UnitedHealth Group (UNH) and Intuitive Surgical (ISRG) headline the week.

As for economic data, the homebuilder’s index on Tuesday and housing starts on Wednesday could impact home builders. SPDR Homebuilders (XHB) and iShares U.S. Home Construction (ITB) have been rallying in recent weeks, helped in part by lower long-term interest rates. The sector stumbled last week on a weak earnings report from KB Homes (KBH) and these reports could impact the sector. On Thursday, the flash purchasing managers’ index for January will be released. Overseas, the flash PMIs for other economies will also be out. China’s fourth-quarter GDP growth rate will be announced along with industrial production; weak numbers there could send commodities such as copper to new 52-week lows.

All in all, it is set to be a very eventful week. There may be new questions on Monday of next week, such as how the eurozone will proceed if Greece demands to renegotiate the bailout conditions, but at least the field of uncertainty will be narrowed, and attention will shift back to the improving domestic economy.

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