Having waited all week, ECB day is finally here and traders are expecting plenty of central bank stimulus from Mario Draghi. Institutions across the board are calling for a 10 basis point cut to the deposit rate, an expansion to the monthly quantitative easing scheme of anything up to €20 billion, and a broadening of the basket of debt that they are able to acquire.
If we are to have surprises, the City is assuming they will be more than expected not the underwhelming performance of last December. It is now a year since the European Central Bank started its version of QE and the jury is still out as to whether it has been a success or not. Considering the time that it took for the US version of QE to take a grip of the market, the current end date of September 2016 is almost certain to be extended.
A solid performance in last night’s US equity markets, along with better-than-expected Chinese inflation figures ensure that European equity markets have a solid base from which to react to today’s news. The short-term resilience of the US markets looks well imbedded with 83% of the constituents above their 50-day moving average and 75% of the S&P 500 members performing equally well.
Excitement levels have been building up to today’s ECB statement and, even with the assistance of rallying oil prices, the worry is that markets having bought the rumour will just as quickly turn to selling the fact. Since 11 February both oil and equity index prices have been heading higher.
Both the CAC 40 and the DAX, the two indices most likely to benefit from further stimulus, have 50% of their members setting new four-week highs while the FTSE, somewhat more distanced, has only 34% of its members hitting four-week highs.
The fact that gold has drifted lower in the last couple of trading sessions is maybe not too much of a surprise as the precious metal had looked a little overbought and this move lower has only brought it more in line with the rising supportive trendlines. Holding above $1240 will be key to whether it will be able to mount fresh moves higher to $1263.
As equity markets have begun to stall, so too has the oil price and the probability is that gravity and fundamental takeover will be a very real worry for the bulls in the coming sessions.