ECB stimulus hopes stimulate risk uptake

While the ECB held monetary policy unchanged, which was quite expected, markets were elated at the prospect of more ECB stimulus in the next meeting, as Draghi intimated as such during his press conference.

European Central Bank
Source: Bloomberg

The elation was translated into gains for equities and oil. European indices marched strongly higher, while US stocks were appropriately less impressed but still benefited.

Oil is an interesting play, where it has been more sentiment-driven than anything else. Of course, the fundamental issue of oversupplied situation keeps oil prices depressed, but not to the extent that the markets have priced in. Nonetheless sentiments could potentially drive crude lower. $20 oil has been floating around for a while, and now seems much more possible.

Yesterday’s sharp rebound in WTI came despite EIA reporting a 4 million-barrel increase in US crude inventories, in line with the earlier API estimate. Even the militant attacks in Libya cannot satisfactorily explain the jump, since Libya has the lowest oil output among the 12-member OPEC, accounting for less than 2% of total OPEC production.

If market participants piled into oil because of ECB stimulus hopes, then the upmove will not be sustainable given that the supply glut will re-exert itself sooner rather than later. What’s also more probably is short-covering interests after the sharp decline recently.

Needless to say, the strong gains in oil will shove some uptake in risk in the Asian session today. A welcome relief after days of panicky markets and risk selling. However, I would be very, very cautious to call it the bottom. It’s the end of the week, and for the past three weeks, the markets have wrong-footed analysts who say that we are going to see a rebound.

The mood is still quite bearish, and who know what’s coming next week. But for now, I won’t contemplate catching a falling knife if I am thinking about long trades. Rallies however may be a good opportunities to sell. Australia and Japan already opened on a positive note.

 

Markets

  • Gains in US indices were not as much as European indices. S&P 500 was up +0.5% and gave up some gains towards the close, the Dow rose +0.7%. Stoxx Europe 600 rallied +1.9%.

 

  • WTI rebounded a massive +11.2% on Wednesday, gaining $3 despite rising US crude inventories. The crude futures has more than recouped the losses suffered in the first two days this week, and extended the recovery in early Asia.

 

  • Risk sentiments improved, helped by the recovery in oil and hopes of additional ECB stimulus. The VIX index dropped 3.3% but is still at an elevated level. Developed market sovereign bonds fell, as funds flow into riskier assets. Yields on 10-year US treasuries advanced around 5 basis points.

 

 

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