Draghi signals and ECB rate cut, Euro rallies – go figure!

May 27, 2014

Last night was a very big night for me.

I thought that the macro-drivers reinforced my view that the Euro is still heading substantially lower but when I sat down this morning the Euro is higher.

Structurally my sense is that the results of the European Parliamentary elections reinforce the ECB has to do something next week and further down the track if the economy and crucially inflation doesn’t recover.

The key here is that besides Angela Merkel in Germany and Renzi in Italy the mainstream parties across the EU performed poorly while those on the left in Spain and Greece and those on the right in Britain and France did very well. The beef of the voters is clearly the intransigence of Brussels and its inability to get growth going. What that means for markets is that the chances of an ECB easing and move toward quantitative easing next week on June 5 have just increased materially and must now be odds on.

Indeed speaking overnight ECB boss Mario Draghi said that in order to fight the threat of deflation “more pre-emptive action may be warranted.”

But the Euro is up from its lows and I find myself once more questioning the lifestyle choices of Euro traders. Personally I think I will sell some soon because at 1.3645 and with an ECB easing coming and an unstable outlook for the EU I’d rather be short than long.

Looking at the chart though you can see why the Euro might have found the strength to lift a little from the lows and the rally might extend to 1.37oo/15 which is the level I’ll be a happy seller with a stop above 1.3763.

Anyway turning back to overnight trade with a probable ECB easing next week and a solid win in the Ukrainian election for new President Poroshenko is a recipe for a rally in stocks on the continent. the DAX was 1.28% to 9,893, the CAC rose 0.75% while stocks in Milan fairly soared rising 3.61% while in Spain the IBEX rose 1.22%.

Don’t forget Ukraine though and keep an eye on Donetsk – there is a battle raging for the airport this morning and while the Russians have warned the new President about the use of force he has pledged to crush the terrorists – in hours!.

Locally on the ASX futures market overnight the SPI 200 June contract rose 7 points in concert with the European rally. That’s quite a small move in context of stellar European gains but this really just highlights it’s Asia and the US markets, in particular, which drive Australian markets.

On local bond markets overnight there was virtually no moves as they too look to US markets for a lead. 10 year bonds are largely unchanged at 96.25 (3.75%) bid this morning while the 3 year bonds are also largely unchanged at 97.19 (2.81%) bid.

On Asian markets yesterday it was another solid day for the Nikkei as its recovery continued. At the close the Nikkei rose 141 points or 0.97% to 14,603. The Hang Seng was unchanged while stocks in Shanghai were 0.32% higher. On the data front there is another vacuum in Asia today so expect the USDJPY moves to dominate trade in Tokyo and the rest of the region to be fairly quiet but with a topside bias.

On Currency markets  the pound was also a little higher and sits at 1.6842, while USDJPY is off its highs and back at 101.92. Was it just that US traders were remember fallen soldiers for Memorial Day? Looking at the Aussie the lack of downside has seen some buyers enter the market once more but trade is light and at 0.9242 is hardly changed from yesterday in any real sense.

Selling at the conjunction of my fast and slow moving averages at 0.9275/80 is a trade I’ll probably take as well today.

On commodities gold is unchanged at $1,291, likewise silver at $19.37, Nymex crude $104.18, and copper is back at $3.19. Wheat fell 1.02% while soybeans fell 0.21% and corn rose 0.26%.

on the data front it is another slow day. There is nothing material until Swiss GDP this afternoon before French and Italian consumer confidence and BBA mortgage approvals in the UK. Tonight in the US Durable goods will be important as will the Case Shiller house price data, consumer confidence and Richmond and Dallas Fed manufacturing indices.

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