The key event this week will be the Fed meeting on Thursday, when we expect the central bank to launch QE3. Such a decision would be strongly positive for equity markets in the short-term. It is the difficult US labor market situation, which remains the key concern for Fed members, wishing to fulfil the full employment aspect of their dual mandate: the August labor market report released last week showed lower than expected jobs growth and the decline in unemployment rate largely due to more people dropping out of the work force.
The political agenda in the eurozone this week is very busy with two major events scheduled: German Constitutional Court deciding on ESM (Wednesday) and the Ecofin/Eurogroup meetings (Friday/Saturday). We believe the German Constitutional Court will approve the ESM. Once that happens and the German president has signed the fund into law, a sufficient number of countries will have ratified the ESM to formally establish the mechanism, what we see as positive for markets.
In our opinion it is likely that Spain will request EFSF financial assistance at this week’s Eurogroup meeting. Such a move is necessary if the country is to participate in the ECB's newly announced OMT bond purchase programme, thus it might be conducive to stabilizing the markets’ perception of Spain and be positive for equities.
Also important will be the Wednesday’s parliamentary elections to be held in the Netherlands, which will determine whether this so far fiscally conservative country will continue to support Germany in fight for fiscal discipline in Europe. Worth watching will also be European Commission’s proposals for a single banking supervision in the eurozone to be presented on Tuesday.
On the domestic macro front, most interesting this week will be the August inflation due on Thursday. We estimate inflation in August fell to 3.7%y/y from 4.0%y/y in July, vs. consensus at 3.8%y/y. The decline in CPI would significantly increase the chances for an interest rate cut by the MPC already at the October meeting.