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Developed markets digest: Trends from the week of November 25, 2013

James Malthus, Macro Analyst

Buy the rumor?

The iShares MSCI EAFE ETF (EFA) was down 0.62% on the week, with Japan and Europe essentially unchanged. The biggest news story came on Wednesday, with a rumor coming out that the ECB (European Central Bank) could cut its deposit rate to -0.1%, effectively making banks pay to park cash at the central bank. The idea is that such a move would force banks to invest excess liquidity into the economy, spurring growth and inflation. The euro fell sharply against the dollar on the news, but was back up to 1.35 USD/EUR by Friday’s close.

There’s quite a bit of data coming out that could move international markets. Wednesday is about the UK, with Q3 GDP and the inflation report coming out. These two indicators should help clear up the state of aggregate demand in the UK. On Thursday, Germany unemployment and Switzerland GDP will be released, showing investors the state of a couple northern European economies. Thursday will also have Japan’s CPI inflation reading for October, which will help show whether or not “Abenomics” is having its intended effects.

The biggest release of the week could be on Friday, when Eurostat releases the Eurozone core CPI inflation reading. Eurozone inflation has been drifting down since mid-2012, and the ECB recently cut interest rates to try to combat it. Another weak reading could lead to more accommodative actions by the central bank, which would be bullish for European equities.

The EAFE and MSCI Europe are still below the October highs. If inflation numbers in Japan and Europe are weak, it could embolden the BOJ (Bank of Japan) and ECB to adopt more expansionary monetary policy, which would be bullish for ETFs such as the iShares MSCI Japan ETF (EWJ) and the Vanguard MSCI Europe ETF (VGK).

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