– The Bank of Canada surprised markets overnight by cutting rates 25 basis points to 0.75% from 1% previously. The cut had not been expected by any of the 22 economists surveyed by Bloomberg, the NAB reports this morning, which meant maximum bang for the BoC’s bucks in currency markets with the USDCAD rising to 1.2394, a six year high. BoC governor Poloz has joined his colleagues in Switzerland, India and Denmark in surprising the markets and he said that the cut was aimed at taking out “insurance” on the Canadian economy which is under pressure from the collapse in oil prices and falling prices.
– There were two other interesting events overnight in Central Bank Land. First was the release of the Bank of England’s MPC vote cut which showed that the two hawks on the BoE have had their wings clipped. Previously two members had believed that the BoE should be be raising rates but all nine members voted to keep rates low and policy accommodative at the last meeting. Naturally, the pound came under a little pressure against the dollar. Also in Central Bank Land there was a big leak saying that the ECB will be buying 50 billion euro of bonds per month. What’s important about that leak is that it is said to have been approved by the governing council, which has some notable hawks on it. If true then, the ECB announcement tonight is going to be a strong one.
– Leaks seem like a nice way to balance potential volatility by having the market assimilate important details of the ECB’s plan before the announcement, but that does not mean that there will not be any big moves tonight. Indeed, in the NAB’s morning note today, Nick Parson wrote that there could still be acute volatility.
We will not see the same volatility which the Swiss caused a week ago (famous last words!), but trading on three, four, or even five different big figures for EUR/USD is entirely possible. And, given extreme levels of positioning as revealed both anecdotally and in IMM data, we prefer to watch this from the sidelines. We’ve exited our short position established at USD1.2435 at 1.1555. A bird in the hand is worth two in the bush.
– Just one thing that’s worth pondering is that when the source of a rise in volatility is central bankers, then we know this is going to be one heck of a year as their credibility, and thus markets’ faith in them, wanes.
– Turning to the US now, and while stocks are higher, the move in the 10-year bonds is intriguing. They have sold off, it seems, on the ECB bond-buying news. Michael Pond, global head of inflation strategy at Barclays, told Reuters that the market “seems to be taking that as a positive risk-on event and so we are seeing equities higher, commodities higher, yields higher.” What’s more bullish than free money, and plenty of it?
– Anyway, at the close, the scoreboard in the US reads:
- Dow Jones up 0.26%, 45 points to 17,556
- Nasdaq up 0.7%, 33 points to 4,667
- S&P up 0.62%, 13 points to 2,032
– European markets are stronger again as we get closer to tonight’s QE announcement. In the UK, the FTSE benefited from the MPC vote cut and a clear signal that rates won’t be heading higher any time soon.
At the close:
- London(FTSE 100) up 0.52%, 34 points to 6,728
- Frankfurt (DAX) up 0.14%, 15 points to 10,299
- Paris (CAC) up 1.16%, 51 points to 4,485
- Milan (FTSEMIB) up 0.92%, 178 points to 19,981
- Madrid (IBEX) up 1.25%, 127 points to 10,335
– Locally, the ASX played catch-up yesterday after lagging so far this week and the rally of 1.6% to 5,393 was a good one for the local market. Overnight, SPI 200 futures have ripped another 38 points higher to 5,381 bid.
– In Asia yesterday, the Nikkei was a little disappointed that the BoJ didn’t ramp things up at this month’s meeting, falling 81 points or 0.47% to 17,280. But the rest of the region was stronger with the Hang Seng up 1.57% to 24,353 while stocks in Shanghai roared back to life, rising 3.81% to 3,324. It’s a quieter event day in Asia today but the ebullient mood of European and North American markets is likely to generate another positive day’s trade.
– On currency markets, the Aussie dollar was poleaxed as its commodity bloc cousin the Canadian dollar came under pressure from the unexpected rate cut. AUDUSD is 140 points below the high of the day at 0.8233, sitting at 0.8093. Euro is at 1.1580, which is not too bad given the leak of the ECB QE news. GBP is a little lower at 1.5121 and USDJPY is at 117.98.
– On commodity markets, there has been a strong energy rally with crude oil up 2.26% to $47.52 a barrel. Nat Gas surged 5.1% and Newcastle coal for March delivery rose $1.40 a tonne to $60.15. Gold is still strong at $1,294 after a brief foray atop $1,300 overnight. Copper rallied 0.44% to $2.6055 a pound while March iron ore dipped $1.10 a tonne to $65.63.
Data and events are scarce in Asia today with just the release of Japanese bond investments and the Chinese MNI Business survey. Tonight the big news is obviously the ECB and nothing else matters. They are out at 12.45 GMT which is just before midnight AEDT.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Fertiliser and explosives group, Incitec looks as though it may finally be having its day in the sun. This stock went broadly nowhere during the major stock market rally of 2012/13. However, it’s rallied 28% from its low in October in what, from a chart point of view has been a strong, impulse rally. This has come courtesy of a weaker Aussie Dollar and, recently, improving seasonal conditions for Australian farmers.
Stronger prices yesterday saw Incitec bounce away from the 38.2% Fibonacci retracement level. If it goes on from here to take out the $3.50 high, this could be a positive sign. Shallow, corrections that only retrace 38.2% are often a good pointer to strong, ongoing trends. If this doesn’t happen and we end up getting a deeper correction that takes Incitec below the 38.2% level, then from an Elliot Wave point of view, any correction that finishes above the peak at “1” will still set up for a rally that ultimately takes the stock back above $3.50.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC