Initial expectations were for €50 billion a month over two years so the pace was faster than the market expected. Overall, this will see the ECB expand its balance sheet by around €1.1 trillion and, combined with another 10 basis-point cut to the TLTRO liquidity, it seems investors feel the ECB went above and beyond.
The language was also very encouraging as the ECB said the programme will be open ended and adjustable as it chases its inflation target. In terms of sovereign purchases, sub-investment grade countries will also be included, which was a big contention point among analysts.
The result was a record high for the DAX and EUR/USD at its lowest level since September 2003. EUR/USD dropped to a low of $1.1317 and remains under pressure early in Asia. There isn’t much of a case to be buying the pair at the moment, considering the increasing divergence between the two economies. We have also learnt recently not to fight central banks and this is just another example. Euro weakness has been coming for a while and it would have been detrimental not to follow the signs.
AUD slips against the greenback
AUD/USD is also on the move and has slipped below $0.8000 for the first time since July 2009. While nothing specific has really happened on the AUD, it seems investors are starting to aggressively price in the possibility of the RBA cutting rates.
With the outflows from the euro and other central banks adopting easing measures, the AUD is not falling as much as the RBA would want to see on a trade-weighted basis and this is not good for the domestic economy. The mistake that most people make is that it’s not only against the USD that the RBA assesses the local currency but against other trading partners as well.
A positive has been the fact the AUD has been falling against the Reminbi but, with iron ore hitting fresh lows overnight, this simply means China can import greater volume at lower prices. It’ll be interesting to see what happens with the RBA in February – if the RBA doesn’t cut as some expect, the language surely will have to reflect the rapid shift in other global central banks in recent months.
The next question will be how much longer the RBA can hope other central banks do the job for it in stimulating growth.
Risk-on for the ASX 200
Ahead of the local market open, we are calling the ASX 200 up 1.3% at 5475. It looks like we are in for a risk-on session with investors reacting favourably to the ECB decision. Central banks remain a dominant theme and, if they can keep working together to stimulate growth, then this will be good for cyclical plays.
At the same time, the drop in AUD/USD will be welcomed by domestic investors and should give some relief to exchange-rate-sensitive stocks. I also wouldn’t be surprised if interest-rate-sensitive stocks start to rally in anticipation of RBA action. A gold rally should see the precious metals names resume their recent positive run.
After a few weeks of stability, iron ore weakness has resumed and this could be a concern for the pure plays, which have been attempting to recover recently. Santos will be in focus – with its Q4 output due out, the stock has been hit by oil price weakness recently.