Eurozone CPI to dominate after key fall in German CPI

• Oil prices tumble as OPEC play chicken

• Multiyear low Oil prices to act as QE4

• Japanese inflation falls, pushing Nikkei higher

• Eurozone CPI to dominate after key fall in German CPI

A mixed looking open expected for the European markets, coming off the back of a particularly strong Asian session. The release of poor inflation data from Japan drove much of that bullish prices action overnight, whilst the existence of the Eurozone CPI number this morning means that many are holding off until what is expected to be a very volatile release takes place. Meanwhile, the insistence of OPEC upon retaining a steady rate of oil output has shocked the markets, sending both Brent and WTI tumbling, and with it goes the chance of many producers to continue to operate. The European open is expected to look somewhat mixed, with futures pointing towards the FTSE100 opening -3, CAC -7 and DAX +2 points.

Yesterday’s announcement from OPEC that saw them retain the current 30 million barrels per day output ceiling was somewhat of an market oxymoron, being both expected and shocking in its nature. The influence of the Saudi’s within the group has clearly been the single most influential protagonist within this saga, whose goals from forcing the price even lower are far-reaching, long term and disruptive. The ability to lower prices below the cost of production for many US shale producers means that many will invariably go out of business, leaving the market altogether or selling equipment and setting them back by years. Meanwhile, by lowering oil prices well below Iran’s cost of production, there is the hope that it will avert them obtaining a nuclear weapon anytime soon as funding dries up. However, the knowledge that many of these producers will have set their prices well into the future with buyers means that these ultra-low oil prices could be here to stay for some time yet.

The establishment of a new lower norm for oil prices comes at a very opportunistic moment, as monetary policy for many is beginning to dry up. However, whilst people protest about the 1% getting richer and how previous stimulus effects fail to adequately trickle down to many, it is hard to think of a more wide-reaching and effective stimulus measure than to lower the cost of gas at the pump for everyone globally. For this reason, we are effectively entering the era of QE4, with motorists able to allocate more of their money towards luxury items, while firms are now able to lower costs of production thus impacting the bottom line and raising profits. The impact of this could be bigger than anything that has come before and the first test dummy will be both black Friday and overall holiday season sales which I believe will be the biggest on record as multi year lows in unemployment come amid multiyear lows in petrol prices to culminate in extremely vibrant retail sales environment.

Overnight, the release of Japanese CPI gave Shinzo Abe more to worry about ahead of the snap election, due next month. Unfortunately for Abe, his decision couldn’t have come at a worse time, with Japan falling into recession a week later and now moving ever further away from his 2% target for CPI. The announcement that CPI fell back to 2.9% meant that when taking into account the April sales tax hike, Japan now has the first sub 1% inflation rate in 14 months, at 0.9%. Markets will be watching closely to see if the coming months show any sign of pickup following the BoJ decision to raise asset purchases to Y80 trillion, yet the bullishness in the Nikkei overnight points to expectations that we could see yet another move from the BoJ in the near future, with a Y100 trillion asset purchase scheme a possibility.

The main event within the European markets today will no doubt be the Eurozone CPI reading, which has been the thorn in the side of Mario Draghi for well over a year now. Unfortunately for Draghi, this does not seem to be going away, with market forecasts pointing towards a fall back to 0.3% after a brief respite last month which saw the opposite move from 0.3% to 0.4%. Yesterday’s German CPI reading of 0.6% was particularly notable given that Jens Weidmann has been one of the opponents to a particularly expansionary monetary policy from the ECB, no doubt driven in part by the German fear of hyperinflation like that seen in 1921-24 in what was then called the Weimar Republic. However, deflation must also be a problem for Germany and finally, their CPI levels are beginning to come closer to the average of the region which will likely bring their views more in line with that of Mario Draghi. For this reason, everything is setup for a more dovish ECB going forward as long as CPI remains low and thus should we see a return to 0.3% it is likely that the stock markets will reflect this in a positive way given what it means for potential monetary policy going forward.