Looking for short-term market catalysts? How about the European Central Bank's meeting on June 9

06/06/2011 3:04 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The European Union and the International Monetary Fund approved the fifth installment of the $161 billion bailout for Greece on June 3. That clears the way for a new more comprehensive bailout program—that is still under negotiation.

More importantly for the near term I think the IMF/ECB approval clears the way for the European Central Bank to clearly signal its intention to raise interest rates in July when it meets on June 9.

The bank raised its benchmark interest rate to 1.25% in April creating speculation that the bank was about to start as series of rate increases to fight inflation. That speculation drove the euro higher against the dollar since the U.S. Federal Reserve had signaled that U.S. interest rates weren’t headed higher until the end of 2011 at the earliest.

In May the bank disappointed traders by signaling that it wouldn’t raise interest rates in June as some had hoped. That fed into a decline in the euro against the dollar that was also getting plenty of fuel from renewed worries about a Greek default on its debt.

Expectations for the June 9 report on the Eurozone economy and inflation rate are that the bank will raise both its projections for economic growth from the current 1.8% and inflation from the current 2.3%. The European Central Bank’s aims to keep inflation close to but below 2%.

That should be enough for the bank to use the code word “vigilant” in its statement about inflation. That word has become the bank’s signal that it intends to raise rates at its next meeting. Economists surveyed by Bloomberg are now projecting a 0.25 percentage point increase in the benchmark interest rate in July.

That signal would probably be enough to move the euro higher and the dollar lower. That in turn would give a boost to the prices of commodities and commodity stocks—and to stocks in emerging markets. That would balance the weakness in stocks that has resulted from last week’s dismal U.S. job numbers and fears that the U.S. economy is slowing.

Whether any statement from the European Central Bank’s language would be enough actually push non-U.S. equities higher or not will have to wait the bank’s announcement.  But at the moment a signal for the European Central Bank that euro rates are headed higher is the only near term positive force on equities that I can see.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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