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The ECB meeting went as planned, but Mario Draghi has pushed the market into believing we are going to see easing of some description. A lot now hinges on the June 3 European ‘flash’ CPI print and depending on the outcome, it will determine how traders will respond. Easing is not a done deal, but one would suspect that a cut to the refinancing rate is a done deal, with the lending rate also being cut from 75bp as well. We may even see negative deposit rates, thus penalising banks for holding funds with the central bank.
There will be some speculation that negative rates will cause European banks to migrate the funds away from the ECB’s balance sheet and place them with other central banks that currently don’t charge. This in turn would increase the perception of a capital flight out of Europe, thus causing EUR weakness. The actual reality of the situation though is that banks will continue to park funds with the ECB, but should pass those charges onto consumers; however some may of course take the hit to margins. The ECB could still look at ways of expanding its balance sheet, where the contraction of excess liquidity has been one of the prominent drivers of the EUR’s appreciation in the last six months.
EUR will now be sold on rallies, especially given the bearish key day reversals seen yesterday against a number of G10 currencies. EUR/USD could head towards the July 2013 uptrend at 1.3783, but despite the threat of ECB easing, the market still needs to decide whether the massive flight to peripheral debt is going to end soon, while the current account surplus is still very attractive. It’s hard to see huge downside on EUR until we start to see spread between Italian (and Spanish) and German debt increase again. What’s important here is that Mario Draghi is dictating play and will likely try and catch the market out.
We also heard from Janet Yellen for the second time this week, although her comments to the Senate Banking Committee offered little new information from comments to the Joint Economic Committee and US yields still remain welded to the 2.60% level.
Aussie interest rates on hold for the year
The RBA released its Statement on Monetary Policy at the same time as China released its Q1 CPI, where in a slight twist of irony saw the RBA cut its inflation forecast twenty five basis points to 2.5% for the end of 2014. The RBA continues to be marginally more upbeat on the domestic economy, but while fiscal drag still provides headwinds, there was a sizeable discussion around a number of uncertainties. Still, the lower inflation forecast seems pivotal here and the period of stable rates continues and thus the right call continues to be that the bank will leave rates on hold for the rest of the year.
China’s CPI fell sixty basis points and at 1.8% was a huge miss to consensus and would be a clear concern for Chinese authorities. Another box has been ticked for those calling for stimulus and it’s interesting to see further evidence today of cracks starting to show in the Chinese property market. Recall one of the biggest risks that economists have pencilled in for China is a sharp decline in construction, and when you hear a number of large property developers have cut prices in Shenzhen (one of four tier-one cities), this is worrying. The fact the PBOC weakened the CNY by twenty-four pips seems testament to the concern, although the CSI 300 is down a modest 0.2%.
Citigroup has boosted a number of iron ore plays
The ASX 200 has lost 0.2%, but it would be up if ANZ hadn’t gone ex-dividend and paid its 99 cent dividend. The interesting dynamic todays is that iron plays have managed to rally despite iron ore trading down 1.3% yesterday to the lowest levels since October 2012, with the AUD price also lower. Citigroup is seemingly behind the rally, with an upgrade across the space. Still one, very brave upgrade does not make these miners a good investment and the good-will towards broker upgrades generally doesn’t last more than a day.
Iron ore futures have fallen 0.8% on the Dalian exchange, so we will see how they fair after the weekend newsflow, which largely looks like it will focus on politics in the Ukraine, amid developments that the EU is now placing sanctions on Russian companies. Still despite the fatigued price action on the broader market, there are only four stocks with their 9-day RSI below 20, which shows a lack of oversold conditions.
Japan has fared better today with the Nikkei up a touch, with further talk of a sizeable cut to the corporate tax rate to 20% (from the current rate of 35.6%), as it tries to make the economy substantially more competitive. Still, we haven’t seen any real moves in US futures and European markets look like getting off to a tough start. Miners will likely struggle, although nickel stocks should find buyers with it being the hot commodity of the moment.
Data seems fairly limited to industrial production and trade data in the UK, while we also get industrial production numbers from a number of European nations. In the US we get JOLTS job openings, which many extrapolate to get an understanding on the next non-farm payrolls report.