ECB stimulus sends european indices up

Fundamental View

We saw Draghi deliver in-line and above expectations with the announcement of €60bn of bond purchases per month, a €10bn beat on the majority of analysts’ expectations. Our initial thought of a long EURUSD trade was nullified as we actively encouraged our traders to trade a traditional QE move with the beat on expectations, the increase in currency liquidity overpowering any notion of the Euro strengthening due to inflation expectations rising. The traditional QE-on trade proved to work out well as we saw both Stocks and Bonds on their highs whilst the currency made new 11 year lows, now trading below the 1.1300 handle against the dollar. The comments that “it will continue until we see inflation expectations move back towards our target of near to but below 2%” assisted in pricing in of a longerterm programme, aiding the currency sell-off extend overnight and into this morning, with traders continue to de-risk their Euro-exposure in currencies. We also saw a bullish extension to the upside in US bourses as the S&P 500 lifted on the open to new week highs, topping out at 2062.00 this morning at 8am. We received the sad news overnight that the Saudi King passed away and oil traders rushed to speculate on the back of prices and the future of the OPEC nation. Crown Prince Salman however has entered the newswires stating that he would maintain the same production policy as his predecessor. WTI and Brent futures lifted briefly on the news of his death but the recent commentary force oil to pare its gains.

Today’s View

This morning saw the release of German Manufacturing PMIs coming in slightly below expectations but the amount of stimulus from the ECB has prevented this from having a broad effect on either the DAX or ESTOXX Indices. We also had headline figures from the Eurozone but this had a similarly muted effect, printing in-line with expectations. Today we have seen continued weakening of the EURUSD and thus we are looking for potential extensions lower into the weekend. However there is a risk of profit taking occurring as traders take out the risk from their position; we do not expect a large rebound from such low levels but we advise traders remain aware of this risk. This afternoon we are waiting for US Manufacturing PMI for January, expected at 54; this is again likely to be ignored if below expectations but will certainly serve to aid dollar upside if the print is above the range of expectations. The majority of traders will be looking for extensions lower in the EURUSD so are likely to amplify the effect of strong US data. We also have December Existing Home Sales; due to the rush to complete before Christmas, this number could potentially be a beat on the headline as many home-buyers would have exchanged contracts and completed around this time.