Draghi underpins European puts

Even with some solid leads from US and European trade, Asia has been lacklustre with some mixed performances across the board.

ECB
Source: Bloomberg

All week the theme has been selling in bond markets and how this has impacted other asset classes. Finally, we saw an official step in to calm the situation and, given Fed chair Janet Yellen had already warned on asset valuations ahead of lift-off, the work clearly had to be done on the European side.

Remember earlier this month that Yellen said returns on safe assets like bonds are very low and that yields could jump on Fed tightening. At the same time she said equity market valuations are generally quite high.

Since these comments were made it’s been nervy times for equities, bonds and the US dollar. However, despite all this the S&P rallied to record highs again.

ECB President Mario Draghi reinforced the belief the central bank will carry out the QE program in full. This seems to have been what investors wanted to hear as it had an immediate impact on markets, helping bond markets settle down and seeing equities rally as fears the ECB may pull the QE pin early abated.

Whether the impact these comments had were just a flash in the pan remains to be seen but I feel traders will remain wary of bond stability in the near term. The risk of further selling will continue to linger among traders.

Lacklustre ASX 200

For Asia, though, China pulled back today while the ASX 200 and Nikkei held on to modest gains. For the ASX 200 it seems gains will continue to be capped as long as AUD/USD is above $0.8000. Moves were disjointed across the board with no dominant theme but AUD-sensitive stocks remained under pressure.

NAB weighed on the financials as the stock traded ex-div. Meanwhile, the healthcare names gained some ground as the greenback recovered some ground, helped by an impressive unemployment claims reading that saw claims dropping to their lowest since April 2000.

If AUD/USD continues to consolidate above $0.8000, it’ll make the situation very interesting for the monetary policy side of things. On the calendar next week will be will be Tuesday’s monetary policy meeting minutes.

Flat open for Europe

Ahead of the European open we are calling the major bourses relatively flat with consolidation likely after yesterday’s strong gains. The sterling and euro were the only G10 currencies the greenback didn’t manage to gain ground against and it’ll be interesting to see if this will continue in the near term.

I feel traders will always be tempted to short the euro at higher levels and this will be a risk in the near term given the euro has had such a good run. Traders will be mainly assessing the situation to see if the moves from yesterday were sustainable or if we are back to square one.

Naturally, if the stability in bond markets can continue, then the strategy of buying dips in European equities will be back in play with the Draghi put in place.

There isn’t much data at all in Europe today but in the US trade we have the Empire State manufacturing index, industrial production and consumer sentiment due out.

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