ECB Meeting: Draghi's dovishness could fall short of market expectations

Stocks gain on solid conviction that ECB, BoE and Fed cannot let the market down
by Ipek Ozkardeskaya

It makes a pleasant change to look at a stock screener and see mostly green today. With China’s stock market closed for the week long military parade, investors in Europe have used the opportunity to look for bargains in the aftermath of the recent rout. Thus, the ‘’out of sight, out of mind’’ mentality is certainly boosting risk appetite today.

Following the wild sell-off in the equity complex, the central banks are naturally expected to remain fully supportive of the financial markets. The European Central Bank will deliver the first official comment after the market rout; the Bank of England is expected to keep the sentiment nice and sweet on September 10th MPC meeting as the base case scenario for the Fed rate hike has been pushed down to December, the earliest.

The delay in Fed normalisation takes the pressure off the Bank of England as investors desperately demand for more liquidity. The softer expansion in UK PMI services has been the cherry on top of the fading confidence in fundamentals. Traders are ready to paint the market in green, should the cheap liquidity flow fuel the appetite.

European equities are all surging higher on a well-justified conviction that the central banks will not and cannot let the market down. The FTSE is up 1.66%, the Dax up 1.91% and US futures are also pointing to a higher open.

A host of broker upgrades has also helped to boost the index.

Reckitt Benckiser is up 3.1%, boosted by an upgrade form JP Morgan. This alone is adding over 4 points to the index in early trade.

EasyJet (+6.52%) Raised its FY earnings guidance. Pre-tax profit expected to be a range of £675-700m in the 12 months ending Sep 30. Late summer demand and record passenger numbers have aided the stellar revenue numbers.

Morrisons (+4.78%) Raised to neutral v sell at UBS.

Glencore (+4.15%) Outlook revised to negative at S&P. The company is set to buy back $350m of 7% perpetual notes next month in order to trim its debt servicing costs as the slowdown in China and commodity price rout leaves its mark.

IAG (+3.96%) Rising in concert with EasyJet but also bumped higher as the acquisition of Aerlingus comes to a close finally.

G4S (-0.92%) Cut to sell versus Neutral at Goldman Sachs. Cut to neutral v outperform at Exane.

Antofagasta (+2.25%) the company expects copper supply to slow and remains upbeat about the medium-long term copper outlook, though cautious in the short term due to China.

Inmarsat (+2.05%) Still riding high on the fact that it was the sole gainer in the FTSE earlier this week on the back of an additional satellite launch

Draghi’s dovishness could fall short of market expectations
by Brenda Kelly

Today’s ECB meeting is likely to show a downward revision in headline HICP inflation this year and in 2016. It’s unlikely Draghi will commit fully to any ramping up of the current programme of bond buying (€60b per month) or indeed guarantee any extension post September 2016. Given that the stimulus measures were intended to push up the inflation rate to its goal of around 2%, we remain very far away from this metric. Five year, five year forward swap rate is little changed around 1.7% and German bond prices have stalled this morning ahead of the press conference. The wild swings in oil prices are certainly not helping matters.

European equity indices, higher and slightly more stable this morning are clearly hoping that Draghi will strike a dovish tone – hope is a poor investment strategy especially given that the FOMC decision takes place in a fortnight. One would expect that Draghi will keep his powder dry until we get more clarity.

When you even have the IMF urging central banks to refrain from monetary tightening in a bid to boost spending when global growth risks are elevated it’s a concern and serves to underpin this market’s addiction to cheap financing and easy liquidity. The fact that equity markets have basically gone nowhere since FOMC QE ended as prospects of a rate hike dampens investor enthusiasm.

Given the solid short positioning in the market, President Draghi’s dovishness could however fall short of market expectations and surprise the looming ECB doves by pushing the euro higher against the US dollar and pound.