Today opened with a dramatic up of dovish rhetoric

Fundamental View

Today opened with a dramatic up of dovish rhetoric. Draghi’s commentary provided scope for extra Euro weakness against the majority of other currencies due to the assumption of quantitative easing. Draghi implied that any further action was contingent on existing measures; the majority of market participants have already priced in that the ECB’s policy thus far has failed. This is evident in the sharp drop in Manufacturing PMI which we saw yesterday and the recessionary conditions in Italy. In addition to this the covered bond purchases and even the ABS purchases are likely to have very little effect due to the availability of such instruments; there are a very limited amount of ABS and Covered Bonds available. Draghi has stressed that inflation has to return to target without delay, something high on the list of concerns in the Eurozone with deflation risk on the cards. This also serves to nullify the argument that lower crude prices is driving Eurozone deflation as he made no mention of this, referring only to Core inflation. This has increased the likelihood of action and driven the Euro lower. The ramp up in the Dovish rhetoric is a physical manifestation of the Governing Council’s approval of loose policy which it is understood that Draghi and certain dovish members of the Council have wanted for several months. This move was spotted earlier with European bourses and the Bund moving higher with the Euro weakening ahead of the statement: Spanish and Italian Government Fixed Income products lift on the release.

Today’s View

Although we have no data due today of note, we also saw the PBOC cut their deposit and lending rate 25 and 40 basis points respectively. This saw risk assets lift to new highs with the S&P 500 and European bourses lift even higher. This means that the majority of the world’s tier 1 central banks have loose policy across the board, with the ECB, BOJ and PBOC easing and the growing consensus that the Fed and BoE will hold off on tightening in the near term. In light of this, stocks have been bid for the majority of the morning session and apart from some de-risking of portfolios and balance sheets ahead of the weekend we cannot see any reason for a major correction. In the Currency space it is likely that the EURUSD move will continue lower so we are looking for retracements on the initial down move today. We are looking for a similar short T-notes today, taking a lower entry and we are looking for opportunities to enter long in crude.

Alternative View

Given the lack of data and the moves seen earlier today the main risk we see for the afternoon ahead is de- risking of positions ahead of the weekend. We recommend slight caution going into the afternoon and emphasise that the majority of macro-moves have happened already. Please trade in respect of this.