Good morning,

Today earning season kicks off in the US with Alcoa. The fourth quarter of 2014 will be a tale of two earnings seasons: the best of times and the worst of times. Companies that benefit from lower energy prices should generally report positive results and have mostly optimistic comments about their business outlooks. Conversely, companies within or connected to the energy sector will likely have a difficult time due to the sharp, swift decline in oil prices. Overall, I expect the winners from cheap oil to outnumber the losers, with another good performance from the equity market.

The next important day that could change sentiment in the markets is the 14th of January. The European Court of Justice (ECJ) will give its opinion on the legality of the ECB’s Outright Monetary Transactions programme (OMT). The German Federal Constitutional Court expressed major concerns about the legality of the OMT last February, saying that it might breach EU primary law if pursued in the manner originally outlined by the ECB. In my opinion the ECJ will be supportive of the OMT. The most it will do is implement a ruling that permits bond purchases by the ECN as long as they are subject to further restrictions.

The ECJ’s verdict paves the way for an even more important day being the 22nd of January. On this day the ECB’a President Mario Draghi will disclose whether they are going to start quantitative easing or not. The answer to this question could be anyone’s guess. However with the latest news of the Eurozone falling into deflation in December 2014 increases the probability of quantitative easing in Europe which will be taken positively (to say the least) by equity markets.

These events alone are more than enough for the first few weeks of the year but there is another big event to close off the month. This time it is on the 25th of January. On this day, elections will be held in Greece. There are rumours in the market of a Greek exit as the political party that is leading the polls (Syriza) will want to renegotiate terms with the EU. Angela Merkel wasted no time and took the opportunity to inform the Greeks that Europe is not going to renegotiate terms and if they do not like it they can just leave.

Although the Greek saga came to haunt us once again, I do not think it will influence the markets the same as it had done in the past. The positives out of this negative situation are as follows;

  • The Greek’s are increasing, rather than reducing, the chances of ECB’s QE during Q1;
  • No contagion is evident so far as Spanish and Italian yields are both below 2%;
  • Syriza’s lead is narrowing;
  • Even if Syriza were to win, I do not expect the worst case scenario to materialize. Political parties have tended to move towards the centre after assuming power;
  • Greek bonds are already pricing in more than 50% cumulative probability of a default over the next 3 years.

What’s certain is that the next two weeks are crucial for equity markets. However I also know that the decisions to be taken will set the tone for the rest of 2015 and I am confident they will put the equity markets on the right track to outperform other asset classes throughout the year.

Good day and happy trading!

Kristian Camenzuli