As European equities rallied heading into the ECB meeting and the euro fell, there was a real risk that the outcome would disappoint and spark a reversal in price action. Having disappointed on a number of occasions in the past, it was important for Mario Draghi to get it right this time and keep the momentum going. The highlights were €60 billion a month of asset purchases with a target to be met in 18 months (September 2016). Initial expectations were for €50 billion a month over two years so the pace was faster than the market expected. Overall, this will see the ECB expand its balance sheet by around €1.1 trillion and, combined with another 10 basis-point cut to cost of TLTRO liquidity, it seems investors feel the ECB went above and beyond. The language was also very encouraging as the ECB said the programme will be open ended and adjustable as it chases its inflation target. In terms of sovereign purchases, sub-investment grade countries will also be included, which was a big contention point among analysts.
Euro remains a short
The next key event for markets will be the Greek elections which are set to take place this weekend. Polls continue to show Syriza in the lead but markets seem unfazed at the moment. While the ECB will include sub-investment grade countries in its sovereign bond purchases, they must be under a programme and there is an issuer cap/limit. In terms of price action, European equities are in a very good space at the moment and it seems they are set to extend their gains at the open again today. The DAX will trade at a fresh record high and seems to be in prime position to extend its gains at the moment. Meanwhile, the euro has been an obvious trade for a while as the ECB made its intentions quite clear. Given the fact the ECB left the door open for further changes to the programme which it branded ‘open ended’ then further euro weakness could be on the way. Traders are likely to continue eyeing selling EUR/USD into strength and taking advantage of the fact it remains in a downtrend. I would be cautious about selling at current levels as the move appears exhausted at the moment with the RSI being deep in oversold territory. On the calendar today we have a raft of manufacturing and services PMIs for France, Germany and the region.
Asia firmer despite PMI miss
Looking around the region, it is gains all around with a buoyant mood as we head into the weekend. The only highlight from today’s trade was China’s HSBC flash manufacturing PMI reading which came in at 49.5, below estimates of 49.8. This has hardly shifted sentiment as investors remain pinned on ECB euphoria. The rest of this quarter will be very interesting for global markets as pressure mounts on central banks that are yet to pull the trigger. This is likely to be a key theme in coming weeks and related currencies such as the AUD are likely to experience some volatility as speculation ramps up. The energy sector has been interesting to watch in Asia with a big recovery as investors reacted to the reversal in oil prices. Oil, gold and copper will be interesting commodities to watch given their relationship to global growth and stimulus. This will also set the tone for cyclical plays in equities with investors speculating more stimulus will lead to a pick-up in inflation. Many investors will also be wondering what this means for the Fed and its rates lift-off expectations. Should all the effort we are seeing in the rest of the world stimulate global growth as intended, then perhaps this will ease pressure on the Fed.