The ECB set the scene for a wild night of volatility on forex and stock markets after Mario Draghi delivered on his promise of more stimulus but also warned the ECB didn’t plan on any more easing.
That meant that after early weakness in the Euro and strength in the DAX and CAC stock indexes in Europe traders reversed course with both moving sharply. Euro is up near 1.12 and the DAX is back below 9500.
That hasn’t really hurt stocks in the US which are having a subdued, but certainly not terribly negative day’s trade. With 10 minutes to go the S&P 500 has just moved back into positive territory.
That’s left the SPI 200 futures not too far from home with a small gain of just 3 points so far. Local traders are free to make up their own minds when the market opens. Will they have the gumption to drive the market up and through resistance?
On other markets the Aussie dollar is still hanging tough in the mid 74 cents region, crude oil is down 1% in WTI terms and gold is up at $1270 reflecting continued concern by traders about what the heck is happening in markets and the global economy right now.
Here’s the scoreboard (7.50am):
- Dow: 16,963, -38 (-0.23%)
- S&P 500: 1,989, +1 (+0.0%)
- SPI200 Futures (March): 5,156, +3 (+0.0%)
- AUDUSD: 0.7445, -0.0037 (-0.48%)
The top stories:
1. The ECB is expanding QE and paying banks to borrow from them – but stocks fell and Euro roared. Mario Draghi did what central bankers do best these days: he added to market volatility rather than dampening it. Certainly Draghi and his colleagues at the ECB said they would expand their QE program from EUR60 billion a month to EUR80 billion a month. He said rates would be cut and go further negative to -4% on the deposit rate, he said also that the ECB would extend purchases of bonds to investment-grade company debt. That was good news. The Euro was lower, the CAC and DAX were higher. Then Draghi delivered the blow that unwound all of what he was trying to achieve.
At the end of his press conference Draghi said “we do not anticipate reducing rates further”. As BNZ’s Kymberly Martin wrote this morning “this appears to be the sound-bite that markets have grasped onto”. That meant the DAX traded back from its high at 9995, to close at 9498, down 2.31% on the day after trading a 5% range. Likewise the Euro traded to a low of 1.0823 after the announcement but is up at 1.12 now for a gain of almost 2% on the day.
Central bankers doing what central bankers do best – undermining their own credibility because they don’t understand the impact of their words and actions on markets and main street.
2. Europe’s banks dragged stocks lower because no-one understood the impact of negative rates – the ECB is trying to fix that. One of the big factors in the stock market rout globally, and particularly in Europe, was the question over what negative rates would do to bank margins. Investors fretted that banks wouldn’t be able to make any money under such a regime and as result profitability would crash.
But Ben Moshinsky says Mario Draghi has cracked the negative rate puzzle for banks That’s because the ECB said its new targeted bank lending schemes would charge a negative rate (our emphasis):
A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.
The NAB’s strategy team said of the move this morning, “banks that fulfil reasonably meagre lending requirements could be paid by the ECB to lend. What is not to like about that?”
3. The ASX200 couldn’t break resistance – what’s next? When a market, or the price of an asset, can’t trade through an important resistance level traders inevitably start to see the level as a good place to sell. So it is that the ASX200 hasn’t been able to get up and out of the resistance levels between 5170 and 5195 we’ve been watching all week. The market hasn’t exactly sold off – yesterday’s close of 5150 and the overnight stability of the SPI200 futures tell us traders and investors aren’t exactly negative.
But just like other periods where resistance has been too strong sellers will re-enter the market eventually if the ASX can’t push higher.
4. The world’s biggest Hedge Fund had an epic rant about the Media. But its the take on China which is most important. I had a bit of a rant earlier this week about thin slicers who don’t take the time to understand China, its economy, its challenges, its progress and its outlook. Overnight buried at the end of a rant from Bridgewater on things the media mischaracterises about them, the worlds biggest hedge fund, was the most perfect and succinct summary of what’s going on in China:
We believe that China is going through the same sort of debt and economic adjustment processes that all countries have gone through at one time or another. These adjustments are healthy and China will come out of them stronger, though it will be weaker while it is going through them. We believe that to characterise China either as not having significant challenges or as facing a terrible situation would be inaccurate. Yet, because many in the media prefer to use more dramatic characterizations, they distort and take our comments out of context.
I couldn’t agree more. And I’m guessing the RBA’s view wouldn’t be too far removed from Bridgewater’s.
5. US oil producers don’t believe crude’s rally is sustainable. I’m a behavioural economics and finance guy, and this means I believe actions speak louder than words. So it’s interesting that the FT reported this morning that US oil producers are locking in higher oil prices by increasing their hedge activity. That means they are selling forward production via futures markets to lock in prices today for production in the future.
The FT said: “The number of active US oil futures contracts for delivery in December 2017 has leapt by almost 40 per cent since January, data from exchange operator CME Group show, in a clear indication of increased hedging activity.”
6. Fed next week – here’s a reminder that the US economy is actually in pretty good shape. While the BoJ and ECB continue to cut rates and drop money on their economies the US Federal Reserve is at a very different part of the cycle. US employment is as strong as it has been since before the GFC. While market turmoil in 2016 means next week’s FOMC meeting is not a “live” one for rate rises there is still a chance that the Fed surprises by being more hawkish than the market expects.
That’s a risk because the markets are not reflecting the economy reality of the economy, wrote Ken Leech, chief investment officer at Western Asset Management. As Bob Bryan reports Leech said the real economy and the markets have diverged so intensely it appears they are in two different dimensions.
“We believe such extreme pessimism is unwarranted,” Leech wrote. It’s an interesting take and worth a read. The FOMC next week is a huge event risk for markets.
And the overnight data round-up (courtesy BNZ Markets)
NZ: RBNZ official cash rate, Mar 10: 2.25 (2.5 exp)
AU: Consumer inflation expectation, Mar: 3.4 (3.6 prev)
CH: CPI (y/y, %), Feb: 2.3 (1.8 exp)
EZ: Main deposit rate, Mar 10: -0.4 (-0.4 exp)
EZ: QE expanded from EUR 60 billion per month to EUR80 billion per month
Have a great day. You can catch me on Twitter.