It was a big night.
– The ECB has delivered a monster QE program promising to buy €60 billion of bonds per month for at least two years. Crucially, Draghi won the battle with the Bundesbank over sovereign bond purchases. The sovereign bonds need to be investment grade, which counts out Greece, but other mechanisms fix that – so Greece continues to get aid.
– It really is the case that the big, big news in all of this is the sovereign buying. Many worried that the Bundesbank just wouldn’t cave in on this aspect. Michael Martinez of Soc Gen highlighted the asset split of the QE program to show just how big the sovereign part will be. “A quick rule of thumb suggests €230bn in ABS and covered bonds, €110bn in European agencies and €800bn of sovereign bonds.” No wonder European bonds, and in particular those of Italy, Spain and Portugal, have rallied hard. But as a sobering reminder that Europe is not the USA and the ECB is not the Fed, Martinez adds: “We argue ECB QE could be five times less efficient than in the US.“
– Another very interesting thing about the QE announcement is not the size, or even the commitment that it is two years, not one. Rather, it is the fact that there is now an open-ended commitment until inflation hits 2% as Tomas Hirst from BI UK writes.
– Besides massive bond market rallies in Europe, the other big impact has been on the euro with heavy selling entering the market right after the announcement driving euro down from 1.1646 to sit at 1.1388 this morning. That’s a big move but to get some perspective on how low the euro could go, just consider this piece I wrote for Go Markets looking at the monthly chart for 20 years.
– And the Danish aren’t happy, with the ECB move forcing Denmark’s central bank to ease policy again, dropping its rate to -0.35%. The second unexpected move in two weeks.
– Turning to the US now, jobless claims were a little up on expectations, rising to 307,000 last week but Deutsche Bank US still thinks that non-farms this month will print a healthy 240,000 when they are released in two Fridays’ time.
– But in the end, it’s all about free money in markets today and at the close, the scoreboard in the US reads:
- Dow Jones up 1.48%, 260 points to 17,814
- Nasdaq up 1.77%, 83 points to 4,750
- S&P up 1.52%, 31 points to 2,063
– European markets are a seas of green. Rallies in stocks and rallies in bonds. Only the euro is in the red – but that’s the point of QE.
At the close:
- London(FTSE 100) up 1.02%, 69 points to 6,797
- Frankfurt (DAX) up 1.33%, 137 points to 10,436
- Paris (CAC) up 1.52%, 68 points to 4,553
- Milan (FTSEMIB) up 2.45%, 489 points to 20,470
- Madrid (IBEX) up 1.70%, 176 points to 10.511
– Locally the impact has to be a better day on Australian stocks, with futures indicating a rally with SPI 200 traders taking the March contract up 33 points overnight to 5,395 bid.
– Likewise, Asia is bound to have a better day with futures indicating another 20 points higher for the Shanghai composite which recovered from early losses yesterday to finish up 0.58%, 19 points at 3,343. The Nikkei futures are up 165 points for March, which follows on from yesterday’s 0.28% gain of 49 points to 17,329. The Hang Seng is also indicating a rally, with futures up 104 points after yesterday’s 0.7% rally to 24,453. That’s the indications but with the release of the Flash Manufacturing PMI indicators for Japan and China this afternoon, there could be a wrinkle if the data disappoints.
– Bond markets rallied and rallied hard in Europe. German 10-year Bunds rallied 8 points to 0.40%, Italian 10s were down 13 points to 1.55% and Spanish 10s closed at 1.41%, down 14 points. US and UK 10s were up a smidge at 1.90% and 1.52% respectively.
– On currencies, it was a crash for the euro which has fallen around two-and-a-half big figures to 1.1380ish. This hit sterling as well, as the US dollar strengthened, and the pound is sitting at 1.5017. The yen has weakened a little to 118.36 from below 118 yesterday afternoon and the Aussie dollar is under pressure but holding in well for the moment at 0.8058.
– On commodity markets, the huge build in US oil inventories, or more than 10 million barrels against an expectations of around 2.5 million, knocked Nymex crude down $1.02 for a fall of 2.13% to $46.76. Copper lost 1.32% to $2.578 and the debasement potential that QE could have on the euro has clearly got the gold bulls moving with a new high on this run overnight. It’s at $1,302 this morning. Iron ore and coal were fairly quiet overnight, closing at $65.84 and $60.85 a tonne respectively for the March contract.
On the data front today, its Flash manufacturing PMI day in Asia and across the globe. China today is the highlight but UK retail sales and Canadian CPI will also be closely watched.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
It looks as though the ECB has delivered a positive trading day for share investors. Woolworths heads into it poised to break through the neck line of a bullish head and shoulder pattern as well as its 55 day moving average. A break out of this pattern might set up for a rally to the 38.2% or 50% retracement levels between about 31.70 and 32.50.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC