Draghi Steps on Bond-Buying; Crude Oil Falls on Forecasts

New York City, New York – (StockNewsDesk) – 10/27/2014 — European and US stock markets are trading below the expectation as the crude oil prices slumped over 1% during the pre-sessions. Additionally, growth in the service sector and home sales slowed marginally, coming in below expectations. S&P 500 indexes corrected from their best week rally as the energy shares weighed on the index as a result of declining crude oil prices. Crude oil prices fell predominantly because Goldman Sachs slashed its target price for the 2015 forecast. This is a cause of concern because crude oil has high supply and low demand. Draghi has moved his bond-buying program into first gear.

Crude Oil – A Major Cause of Concern

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Crude oil prices continue to drop, which is a major cause of concern. A couple of weeks back, there was financial turmoil because crude oil prices tumbled nearly 27% from its high of $117 a barrel to $80 a barrel. Today the prices broke the $80 level for a moment. Then, the investment bank, Goldman Sachs, said that the crude oil prices could reach and sustain $70 level by the second quarter of 2015. In addition to this, the Organization of the Petroleum Exporting Countries (OPEC) has not yet taken a major stance on reducing the supply to keep up equilibrium with the demand side. OPEC countries are due to meet in Vienna on November 27 to decide on cutting crude oil production.

Economic Data

Economic indicators were sluggish today. Markit’s Services PMI data came in below expectations at 57.3. This reading is also below September’s figure of 58.9. It is the lowest reading since April. In another report released by the National Association of Realtors, pending home sales data came in below expectations. It only grew 0.3% compared to expectations of 0.5%. US lawmakers will report the Gross Domestic Product (GDP) of the US on Thursday. While some expect the economy to expand at 2.5%, some expect it to expand by 3%.

Draghi Steps on Bond-Buying; Crude Oil Falls on Forecasts

Draghi Puts Stimulus in Gear

Deflation is the biggest threat to the euro zone’s economy. Five of the 18 Euro zone members are already battling deflation while inflation is at dangerous levels in other countries. Considering these circumstances, Draghi has put the bond-buying program on fast track. The Central Bank has purchased assets from countries like Portugal and Germany. The value of the assets purchased is $2.2 billion. The goal is to reach the 1 trillion euro mark.  US and Japan have implemented strategies of bond buying and have been relatively successful.

The euro zone has a covered bond market of 2.6 trillion euro. However, assets will only be purchased from those which have a collateral framework in place. All purchases will be euro dominated. Of the 1 trillion euros, 600 euros are those different pools of bonds while the remaining is Asset-Backed Securities (ABS).

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