BNP PARIBAS Eurozone activity, the impact of the Red Sea crisis on commodities, and monetary policy meetings by the Indian and Australian central banks will all be on investors' radar next week.
1/ Eurozone growth in question
A salvo of indicators will clarify investors' projections on the health of the eurozone.
The final services and composite PMI indicators for January will be published on Monday, along with eurozone producer prices for December. German industrial orders for December will be announced on Tuesday, along with eurozone retail sales. German industrial production for December will be published on Wednesday, and final German inflation for January will be released on Friday.
These indicators will be all the more important as the eurozone narrowly escaped recession in the fourth quarter of 2023, thanks in particular to the surprising performance of the Spanish and Italian economies.
"For the eurozone, the worst seems to be behind us", notes Hélène Baudchon, head of the OECD economic team at BNP Paribas.
"The slowdown in inflation, coupled with the European Central Bank's rate cut and the dynamism of wages in the bloc, should contribute to a rebound in consumption, which will support growth in 2024".
The bank is forecasting growth of 0.6% in 2024 for the eurozone, which will have to rely in particular on the engine of domestic demand, as the relay from external demand appears limited by the difficulties of China, affected by a double crisis of consumer and investor confidence, and which will no longer have the same capacity to drive global growth.
For European growth in 2024, "one of the major unknowns will be the depth of the cyclical and structural difficulties facing the German economy - the single market is the primary outlet for European countries", points out Hélène Baudchon.
The ECB rate cut could also shift investors' attention from monetary issues to debt sustainability.
"According to European Commission data, the reduction in the primary structural deficit averages 0.7 points per year from 2022 to 2024, compared with 0.9 points from 2011 to 2014. However, the more positive growth environment should limit the impact of these efforts on activity", explains Hélène Baudchon.
2/ Geopolitics in ambush
Escalating tensions in the Red Sea reached a symbolic milestone on January 26, when a tanker belonging to commodities broker Trafigura was hit by a missile fired by Houthi rebels. For the time being, tensions have mainly affected freight rates, but energy could be the next sector to be affected.
"Refined products are the Achilles' heel of European inflation, as the bloc has historically been an importer of distillates", notes the commodities research team at Société Générale, which points out that fuel prices weigh more heavily than crude oil in the European consumer basket.
The end of Russian product imports has made the euro zone dependent on flows via the Suez Canal, while inventories remain close to their lowest levels in five years and refining margins on diesel are more than twice their average over the last ten years, at $30 per barrel, according to data restated by Société Générale - an indicator that capacities remain constrained.
In December, oil tankers had not announced any changes to their voyages to Europe, but more and more energy groups are announcing that they will be transiting the Cape of Good Hope in early 2024, adds ING.
In the short term, refiners will have to adapt to lower oil flows, but the main risk lies in an escalation of tensions in the Strait of Hormuz, the bank adds.
In its latest forecasts, the IMF expects "intense" fighting in Gaza to continue throughout the first quarter.
3/ India in the spotlight
The next meeting of India's central bank is expected to take place on Thursday, with no surprises in store: the institution is likely to maintain interest rates at their current levels. However, the event should focus investors' attention on the sub-continent, whose assets have been among the best performers in emerging markets in recent years. [urn:newsml:newsroom.refinitiv.com:20190807:nL8N2531OI:0]
Since its levels reached during the Covid, the Nifty index has outperformed other emerging indices by over 50%, with valuations returning to their 2007 highs, according to Datastream data.
The country has benefited from the slowdown in China's economy, which has driven international investors to India: the country recorded $20 billion in inflows in 2023, compared with just $8 billion for China.
Sovereigns could now outperform in turn, as index provider Bloomberg considers including Indian debt in its emerging sovereign indices, with JPMorgan having decided in September to include Indian securities in its indices.
"We expect demand for sovereigns to grow, supported by a more accommodative monetary outlook, ample bank liquidity, and massive foreign purchases, through passive funds and from a carry perspective", summarize Bank of America's strategists.
4/Australian inflation finally under control
The next meeting of the Central Bank of Australia on Tuesday should confirm that inflation is finally back under control, after the country's long struggle with out-of-control price dynamics that have eroded confidence in the central bank.
On January 30, a weaker-than-expected inflation indicator propelled Australian indices to a record high, as the prospect of a persistently restrictive monetary policy had crushed Australian risky assets in recent months.
How these indices evolve will now depend on the Chinese economic outlook and projections for rate easing in the USA, while Australian economic fundamentals are not buoyant. (Written by Corentin Chappron, edited by Sophie Louet)
