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Draghi's dovish tones likely to support equities

The DAX, which is within striking distance of its all-time high, will be in focus this week with the European Central Bank meeting set to take place on Thursday.

ECB
Source: Bloomberg

Traders continue to eye this week’s ECB meeting very closely despite an unlikely possibility of Quantitative Easing being announced. Staying on the topic of QE, ECB member Sabine Lautenschlaeger suggested a broad purchase program of government bonds does not give a positive outcome. She also made an interesting point that long term interest rates on Spanish and Italian government bonds are already lower than those from the US or the UK; and as a result it is questionable whether the ECB should depress interest rates for those securities even further. These are some interesting points and will likely have to be addressed at some point. While the ECB is not expected to announce new measures this week, ECB President Mario Draghi is likely to continue his dovish tone. Recent commentary from the ECB suggests a wait and see approach is in order, following the measures already announced  and therefore Q1 next year will be a key period. Having said that, the dovish tone and a weaker EUR will likely continue to support European equities. German equities have led the way and the DAX is fast approaching its all-time high. In June, the DAX hit the record high of 10,051 and traders already long are likely to be targeting that level. There are a couple of scenarios that could play out and I feel a momentum play could be on the cards. Traders could consider buying the index on a break above 10,051 or a pullback into 9,850. Once one of these scenarios plays out, I will update the trade with stops and targets. Ideally stops will have to be under 9,700.  

 

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