One of the main events of the month comes this afternoon from Frankfurt as the European Central Bank (ECB) concludes its final policy meeting of the year. With expectations high for an extension of the current asset purchase programme, there is plenty of room to disappoint, especially given the recent steep run up seen in stock markets. Heading into the meeting the FTSE 100 is little changed after yesterday the index posted its biggest rise in almost a month, whilst the pound is recouping some of the losses seen this week in early trade.
Taper to overshadow QE extension?
With the current stimulus package being used by the ECB in an attempt to reflate the Eurozone economy set to expire in March 2017, and inflation still running below target levels, many expect the central bank to announce an extension later today. Quantitative easing has historically been seen as positive for stock markets and a downward force on the currency, as the bond buying programme suppresses yields making stocks relatively more attractive and the currency relatively less so. Along these lines an extension should therefore be Euro negative and provide a boost to stocks. However, the market reaction may not be quite so straightforward and as is often the case with central bank policy the future intentions may have a greater impact on the market than current policy. This is where any taper talk may usurp a QE extension.
Does Draghi risk Taper tantrum II?
Back in 2013 when then Fed chair Ben Bernanke announced that the US would be reducing their asset purchases, the market threw its toys out the pram with large scale sell-offs seen in bonds and the stock market. Whilst the situation in the Eurozone is different in many respects, a market that has grown accustomed to unprecedented levels of central bank support may react to plans for its eventual withdrawal in a similar manner to a toddler who’s lost their dummy. With bond markets around the globe tumbling in the past month since Donald Trump’s election victory, many are starting to question whether the bull market that has lasted for over 30 years is set to end. Any mention of “taper” in President Draghi’s press conference could provide another blow to bond market Bulls who are rightly worried that their long winning run could be coming to an end.
Sports Direct (LON:SPD) report sharp fall in earnings
The latest earnings report from Sports Direct makes pretty grim viewing at first glance and the share price has fallen by a little over 2% in early trade. Having said that, with the stock off by more than 50% in the past year there's only so many times the same bad news can be discounted and with the current price showing the firm in an attractive light by many fundamental valuation metrics, bargain hunters may begin to look to cautiously enter.
Group revenue continues to rise on a currency neutral basis, but let's not forget the retailer took a £15m hit on the flash crash in the pound in an unexpected and unwanted shock back in October. The worst parts of the report come from the falling earnings with group EBITDA dropping by around a third and underlying profit before tax lower by 57%.
CEO Mike Ashley admits the last six months have been tough, but his comments suggest a belief that a couple of the adverse developments on the business have been one-off in nature (fall in the pound, bad PR from MPs inquiry) and that better times lie ahead. A medium to long-term goal to turn the business into the "Selfridges" of sports retail sounds overly ambitious at this current point, but it could ultimately see a move away from budget products to become more of a high-end retailer which presents the opportunity for greater margins in the long run.