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European equities rallied yesterday as downgraded geopolitical risk proved a catalyst to price action. With Russia and Ukraine looking to resolve their conflict, Russian equities rallied along with the ruble as investors cheered the news. A resolution would reduce the probability of more sanctions being imposed and prevent further strain on the region. Europe is heading into autumn, when energy needs tend to rise, and with Russia controlling most of the region’s supplies, any restrictions could be detrimental.
Having said that, focus swiftly shifts to the ECB, where analysts are quite split on how events might unfold. The minimum bid rate is announced at 21.45 AEST, along with the marginal lending facility and deposit facility rate. Consensus is for no change in these readings and any surprises here could therefore result in a move.
The ECB press conference will then be held at 22.30 AEST, where Mario Draghi will be under pressure to at least signal imminent stimulus. After his speech at Jackson Hole, Draghi put pressure on himself to deliver but the market remains unconvinced he will act. Analysts have been quite split on what Draghi’s speech, with a small camp suggesting he’ll announce a QE program and the majority feeling he’ll signal a stimulus announcement at a future meeting. If that happens, the debate will switch to what sort of stimulus package the ECB could implement – the consensus is it will be centred on asset-backed securities (ABS).
Traders still looking to sell the euro
As far as price action is concerned, we’re already seeing some caution exercised with opening calls for the region pointing towards mild weakness. EUR/USD has come off its lows heading into the ECB meeting, with some traders closing out shorts before the decision.
I feel there is a real risk of a reversal in equities and the euro, unless the ECB signals an imminent plan for QE. Even if the euro rises today, I’d still be looking to sell it on strength. Any indication that it is business as usual from the ECB could see EUR/USD run up to $1.3227 – the 61.8% retracement of the July 2013 low to May 2014 high. We could then see sellers return in this region and take the pair lower.
However, should we see some action today, then a retest of $1.3100 is likely and momentum plays could then see the pair trade even lower. The BoE will also be on the wires today and this could result in some volatility for the sterling, which has been under significant pressure recently.
Nikkei strength subsides
Around the Asian region, the most significant move has been a pullback in the Nikkei – a significant outperformer all week. We’d seen growing interest heading into the cabinet reshuffle and the BoJ meeting.
However, it now seems profit taking has kicked in, with investors happy to ‘sell the fact’. While I still feel buying the dips is the best strategy with USD/JPY and the Nikkei, it seems a fresh catalyst might be needed to reignite the trade. This might have to be on the US side of things, as greenback strength would achieve the desired effect. On the US economic calendar today we have trade balance, unemployment claims and the ISM non-manufacturing PMI. There are also a few Fed members speaking, including Fisher, Kocherlakota and Powell.
Iron ore continues to struggle
After having been underpinned by yield plays for an extended period, the ASX 200 has finally given up ground today, with the weight of the under-firing materials plays finally catching up. Strain in iron ore prices continues to spook investors and this has continued in Asian trade as iron ore futures have struggled.
Fortescue has outperformed today after reiterating its FY goal of shipping 155Mt-160Mt of iron ore. Its stock also found support in the $4 region, but the price action still remains unconvincing in the near term. Perhaps strength in AUD/USD hasn’t done the local market any favours today following a lift from better-than-expected trade balance numbers. The RBA has said time and time again that a firmer AUD is not ideal for the domestic market, and this seems to be really having an impact on equities.