Looming non-farms caps gains

Traders bored with the somnolent trading of the first three days got volatility in spades today after the ECB unveiled its rate cuts and fresh stimulus measures.

A jobs banner displayed on the side of a building
Source: Bloomberg

DAX hits 10,000

The first week of the month usually sees all the excitement delayed until Friday when non-farms arrive, but the European Central Bank has got in there first. Expectations for action were high, but Mario Draghi arguably lived up to them, with cuts to rates, cheap loans and suggestions of QE.

Like Gaul, it appears the ECB’s measures are divided into three parts, with the third part, the reaffirmation that unconventional policy will be used if necessary, perhaps the most potent element.

The DAX surged through 10,000 on the news, and equity indices generally rallied, but as often happens on a non-farm day the gains were fleeting. Still, as we head into the rest of June the knowledge that the ECB has finally shaken itself from a long slumber and begun to act should provide a decent rationale for investors to buy into the market.

S&P 500 returns to 1930

US futures bolted higher on the ECB news then slipped lower like most indices, but as the afternoon wore on the S&P 500 began to tiptoe back to 1930.

In all the Draghi-frenzy jobless claims were almost overlooked, and while the headline number edged higher the four-week moving average hit its lowest level in seven years. High expectations for the ECB meant that the market’s initial euphoria rapidly died away, and the nearness of non-farms kept traders from getting too carried away, but it is the ECB meeting that will resonate into next week and breathe new life into the equity rally. 

Gold holds on to gains

The ECB’s actions have, for the afternoon at least, reignited the trade in gold and silver, both of which spiked higher and, unlike their equity market cousins, held on to gains. Gold bugs are rubbing their hands at the thought of the ECB finally joining the global QE party, just as the Federal Reserve begins to make its exit and the Bank of England nervously eyes the door. As was the case in January, $1240 provides a floor for gold that should allow it to push further away from oversold levels and back towards $1300. 

EUR/USD slides

There was more than enough volatility in EUR/USD to make up for the rest of the week, as the currency swan-dived towards $1.35 before doing an about turn and retaking $1.36. There are echoes of November, when a rate cut by the ECB marked the starting point of a surge in EUR/USD, but this time history is unlikely to repeat itself. Instead, the prospect of QE, and the fact that ‘we will do more’ has become the new ‘whatever it takes’, should act as a significant barrier to further upside.

EUR/GBP touched 18-month lows, as the contrast between the BoE and the ECB becomes starker. But the ECB flooding the market with cheap money is only going to put more upward pressure on the pound, which would hobble inflation yet again. 

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