Draghi ignites stocks and hurts Euro, Aussie still strong

While there will be a lot of focus on the S&P 500 breaking 2000 for the first time ever last night for me the big moves is the confirmation – or at least the expectation – in markets that Mario Draghi is going to deliver quantitative easing to Europe.

Lets face it he needs to do something for the moribund economic zone.

The impact of this growing belief was a monster rally in European bond markets which saw Spanish 10′s down 16 basis points to 2.23% for a capital gain of 6.73% on the night. Clearly like tomato sauce on a bad meal free cash fixes everything. Italian 10′s dipped 12 points to 2.46% and German 10 year Bunds dropped 6 basis points to 0.93% for a capital gain of 5.79% on the day.

The Euro was lower but didn’t fall too much further than where it was yesterday even as a large number of banks downgraded their near term Euro forecasts to 1.30 or lower.

We have a clash of time frames here. Euro on the dailies looks like it might, might be a little oversold and in need of a consolidation. So as risky as it might seem I am going to stay short rather than booking a short term 170 pip profit.

Is that mad in a low vol market? Probably but on a longer time frame I believe Euro is going substantially lower and I want to hold my position.

Looking at stocks the ebullience in bonds was similarly found in European stocks which ignored the weaker than expected German IFO (111.1)  instead rallying. The DAX was 1.83% higher to 9,510, the CAC in Paris was up 2.10% even as the government resigned – the power of free money. Stocks in Milan and Madrid rose 2.29% and 1.81% respectively. The FTSE in the UK – which won’t benefit from ECB QE – fell 3 points to 6,775.

In the US stocks rallied as well in a move which was, once again, counter to the data, which printed on balance weaker than expected. Markit services PMI printed 58.5 against 59.5 expected and 60.8 last while new home sales were down 2.4%. The Chicago manufacturing index was however on the bright side. Key to the rally seems to be thoughts that the Fed’s stimulus will soon be replaced by QE from the ECB.

In the end the Dow was 76 points higher for a gain of 0.45% at 17,077, the Nasdaq rose 0.41% to 4,557 and the S&P closed up 10 points to 1,998 just shy of the new all-time high. Readers know I don’t trust this market but if it is just going to transition from US QE to ECB QE as the driver then as Deutsche Bank strategist wrote overnight in the US – “Buy Equities“. Not a great time to be sitting in cash :S.

Locally after a pretty good performance all things considered yesterday the ASX futures are up overnight with the September SPI 200 contract up 5 points to 5,604. The miners might be a handbrake though on the index with iron ore down another 75 cents to $89.25 a tonne and just 52 cents above the low for the year. As I wrote yesterday at Business Insideryesterday this is a huge level.

In Asia  it was a mixed day with the Nikkei up 0.47% after BoJ Governor Kuroda delivered a speech at Jackson Hole suggesting he won’t be taking the foot off the peddle anytime soon. The Nikkei ended at 15,613 up 0.47%. The Hang Seng rose 0.22% to 25,167 while stocks in Shanghai slid 0.53% t0 2,229.

On currency markets as noted above the Euro actually did really well overnight considering the French political ructions and the weaker than expected German IFO. It sits this morning at 1.3193 which is not bad all things considered. Sterling is at 1.6580 and the US dollar has slipped a little against the Yen but is still very strong at 104.01. The Aussie dollar is back under 93 cents but still materially out performing its larger rivals gaining ground on the crosses as it sits at 0.9295 this morning.

Technically the Aussie is still in this big old range/box but it does look biased to test the bottom of the range given US dollar strength. On the Major crosses though it looks strong but is likely to pause around these levels and maybe reverse against the YEn and Euro short term.

On commodities as noted above iron ore is looking dangerously bearish. Newcastle coal was unchanged at $69.65 a tonne. Nymex September crude was down 22 cents to $93.43 a barrel, gold is at $1,280 an ounce with solver at $19.41 while copper rose 3 cents to $3.20. The Ags were mixed with corn up 0.9%, soybeans ripped 2.62% higher but wheat fell 1.63%

The data calendar is very light today which means that there is little to derail Asian markets from last nights moves. The Chinese leading indicator is out which could see some interest though. Tonight durable goods in the US are out and they will be very important as a lead and read on the state of the US economy.

Greg McKenna

NB: Please note all references to rates above are approximate

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