Draghi's dovish comments allow stocks to maintain bullish extension

Yesterday’s market action

Yesterday saw a continuation of the move in the currency space with the dollar weakening against both the Euro and the Pound in morning trade. PPI data printed worse than expected and saw a touch of dollar weakness continue where the initial Jobless Claims figure counterbalanced this as we saw the year average at a 15 year low for the study. A large fundamental driver for yesterday afternoon’s trade was Draghi’s speech in Washington yesterday afternoon. His main points of interest were the calming of any concerns that the ECB would slow the pace of asset purchases. This largely mirrors his press conference in April where many were enquiring as to the potential date of a tapering of the ECB QE programme. This came at an interesting time where we have seen modest growth return to both France and Italy earlier in the week. However Draghi reassured market watchers that “we will implement in full our purchase program as announced and, in any case, until we see a sustained adjustment in the path of inflation.” This effectively stated that the ECB QE has no end date until the deflationary/disinflationary environments correct. This sparked a reversal of the EURUSD, allowing the pair to trade lower but we since saw the pair retrace back higher as market participants interpreted this announcement as nothing new. In the equity space we saw the S&P 500 close at a new all-time high, seemingly breaking above the highs of the currently established range. This was largely led by the rise in European bourses on the back of Draghi’s commentary, allowing a push higher in global equities in a correlated move.

Today’s View

Overnight we saw a rise in Chinese expenditure growth, reflecting an expansionary environment rather than a contractionary stance of Fiscal Policy. This has helped maintain a slight gain on Asian equities overnight and kept the S&P bullishness fire fuelled; this morning we have seen a test of the highs on both the DAX and ESTOXX taking a similar lead from Asian and US bourses. We have since drifted slightly lower off the highs, capped by limited appetite for further upside and strong psychological levels, specifically in ESTOXX as it tested 3600. We have seen similar low-volume markets across the currency space, trading with little conviction. Currencies have drifted lower on very little trading volume, tripping through lows as the dollar begins to strengthen once more. The majority of the moves have remained contained within their technical levels and thus steady trend-following strategies or range entries have been the call for the morning. We look ahead to a calendar with a few points of interest; first on the roster is Empire Manufacturing for the month of May, followed by Industrial Production for April and University of Michigan sentiment. These are all likely to spur moves in markets which have had little data to feed on for the past few days so it is likely the moves will be over exaggerated.