European Stocks to Tread Water, Watch ECB

The European Central Bank's outlook on interest rates will dominate the European stock markets next week, when trading is likely to drift in light volumes ahead of Thursday's big announcement, traders told


"A lot of investors are going to sit on the sidelines," said Max Asmelash, senior trader at JN Financial, adding that there could be erratic stock movements around the decision and ECB President Jean-Claude Trichet's subsequent comments.

Euro Zone interest rates have been held steady at 4 percent since June 2007, during which time the Dow Jones Euro STOXX 50 has lost over 15 percent of its value. Many market watchers think slowing economic growth will force monetary easing.

The ECB will keep rates at 4 percent on Thursday, but cut twice in 2008, Otmar Lang, director of research at Citigroup Private Banking, predicts.

"Currently economic growth is relatively robust … but the situation could change and the ECB probably has some room to bring rates down," Otmar said. Easing inflation pressures will also remove barriers to future rate cuts, according to Otmar.

"If the ECB is on hold for longer then expected, we could see further appreciation of the euro and this could turn out to be detrimental for the European equity markets," Otmar warned, suggesting that if Trichet doesn't signal a rate cut Thursday, stocks could take a leg lower.

If Trichet drops strong hints that easing is around the corner, expect stocks to get a lift, Otmar said.

The Bank of England will also hold its monthly meeting Thursday and is widely expected to leave interest rates steady at 5.25 percent.

Oil, Gold and Politics

The record high prices of oil, gold and other commodities will remain a key feature next week and fresh peaks could be reached, analysts said.

"I'm very bullish on the commodities side," Asmelash said, "in the coming weeks gold will reach $1,000 (a troy ounce)."

The results of Russia's election could also add volatility to energy markets, as investors react to fresh policies from the oil exporters' new leader.

The spectre of more writedowns from the banks will likely keep downward pressure on the sector's stocks, with UK's HSBC reporting earnings on Monday.

However, depressed prices make the banks prone to takeovers, Asmelash said, offering some speculative trading opportunities. On Thursday, it emerged that officials from French bank BNP Paribas had approached the government to discuss a possible bid for scandal-hit Societe Generale, Reuters reported.

Other important events that investors will watch next week include earnings from mining giant Xstrata, a report on euro zone manufacturing activity and the run-up to Spain's elections on Sunday.