A very strong move in commodities overnight looks likely to drive trade forward in Asia today. Copper and oil were big gainers overnight, which saw massive gains for the major diversified miners on the FTSE. The change in sentiment was most evident in oil, which rallied over 5% despite another massive blowout in US oil inventories.
Asian markets are looking set up for a very strong day. The Nikkei in particular looks set to retrace yesterday’s losses and gain 2.6%. The big 5.5% gain by BHP’s ADR and 1% gain in CBA’s ADR is pointing to a strong session for both the banks and materials on the ASX today. Combined with the big gains in oil overnight, trade in the ASX today looks like it will be driven by the worst performers of recent days: energy, financials and materials.
The Draghi stimulus gun show
Markets were understandably very excited by Draghi stating the ECB may be forced into action at their March meeting. Brent had dropped 40% since their last meeting on 3 December, which was likely a key factor behind Draghi’s statement that, “Euro area inflation dynamics also continued to be weaker than expected”. The ECB’s technical team are looking at what may be the best path forward, but cutting the deposit rate further into negative territory and extending the Asset Purchase Program both look likely avenues going forward. The ECB also announced they were to boost their asset-backed securities holdings by 10% by Friday, with the buying focussed on Spanish and Dutch bonds.
While markets have unanimously rallied off the news, the moves in EUR/USD do raise some concerns. The Euro initially dropped 1% off the news, but within a few hours of trade had largely retraced that whole move. Markets were underwhelmed by the scale of the ECB easing at their meeting in December and clear divisions within the ECB were clear, with a number of German and Eastern European central bank members voting against the decision. This does raise valid questions over the scale and freedom Draghi will have to carry through on his promise for March. Will he return to overdelivering or will we see another underdelivery of stimulus?
The ECB meeting overnight may have set the tone for the Fed and BOJ meetings next week. Despite some weakening in US data of late, I think the Fed will be keen to defend its decision to hike rates in December. There is a growing minority opinion that the next move by the Fed is more likely to be a rate cut. Even though the market sees no significant chance of a rate hike until September, I think Yellen and other Fed members will be keen to zero in on June as the next possible rate hike date, if data allows. While data has weakened and markets have sold off sharply, the wheels are hardly coming off the US economy just yet.
Moves in Japan
With the yen breaking into the 115 handle this week - its strongest level in a year - and inflation way off target, the case for some kind of move or statement towards further easing by the BOJ is pretty strong. A close aide to Shinzo Abe was cited by the WSJ as saying the “Conditions for additional easing have fallen into place”. The “supplementary” easing measures announced in December looked more like a technical rearrangement of the monetary easing program. This only fuelled investor scepticism that the BOJ was increasingly tapped out in its ability to further extend QQE. And unusually, 3 board members voted against even that minor adjustment, with two other members joining the long-standing BOJ hawk, Takahide Kiuchi.
Nonetheless, if markets do continue to stabilise in the short term, a long position on the USD/JPY with stops at 115.5 going into the BOJ meeting next week does have a nice-looking risk-reward payoff in the event some easing does come out of the BOJ.