Draghi stimulus hint lift European stocks
Mario Draghi has been back on the airwaves this morning doing what he does best. The ECB President – for a few more months at least – has become known for his ability to talk down the euro even during periods of tightening and this morning, he’s delivered in true Draghi fashion once again. His claims that the asset purchase program still has considerable room and interest rates could fall further did not fall on deaf ears, with the euro shedding a third of one percent against the dollar (around 50 pips) and stock markets which had opened relatively flat moving healthily into the green. All in a morning’s work for the man so adept at this kind of thing.
There were no hints at when policy loosening will come but the admission that these options were discussed at the last meeting and will be discussed in future suggest we may not be far away. That was enough to send bond yield tumbling, with the German 10-year hitting a record low, continuing the trend its been on since early October. It wasn’t too long ago that we were facing the prospect of rate hikes to mark the end of Draghi’s tenure but clearly the era of unconventional stimulus is not behind us after all.
GBP lower ahead of more leadership votes
The Conservative party leadership election has not been kind to sterling so far, with contenders being forced to paint themselves as the bigger Brexiteer and the more willing to leave without a deal, so as to compete with the front-runner Boris Johnson and stand a chance of winning over the Tory membership, who’s views on these issues are well known. Unfortunately, these views don’t sit well economically and therefore with the currency which is why the decline has been quite consistent.
Another casualty will fall following the race today and if that is a remain-voter and/or a proponent of delaying exit day rather than embracing no-deal, it’s unlikely to sit well with the currency. It will also make for an interesting debate this evening, when the remaining contenders will face off, this time in the company of Johnson who will have a chance to defend himself.
Fed meeting remains at the forefront of traders minds
Draghi may have provided a handy distraction this morning and the UK leadership election may well continue to do the same but we shouldn’t kid ourselves, this week is still all about the Fed. Tomorrow’s decision may well shape how markets trade ahead of next week’s G20, after which we should have a much better idea of where trade talks between the world’s two largest economies stand.
The Fed has a tough job on its hands, pre-empting those talks and coming up with economic projections and a dot plot, not to mention living up to some very dovish market expectations. The chance of the Fed failing to do so strike me as being quite high and perhaps the apprehension we’ve seen so far this week in the markets are a reflection of that.
