ECB demoted to side-show: Amplify US Strategy

The Day So Far

A fairly quiet morning in terms of overall market movement but certainly plenty of macro themes to contemplate in the days and weeks ahead. Starting with Fed Chair Janet Yellen who last night stated that ‘I and most of my colleges’ are expecting a few hikes a year. Although the financial press have put a hawkish spin on these comments I would suggest not reading to much into them as this is just another way of suggesting that the three rate hikes foreseen in the recent Summary of Economic Projections remains appropriate. Possibly the more important part was that she said the ‘timing of the next rate increase will depend on the economy’ which reaffirms their somewhat cautious approach in that without more details on Trump’s fiscal policies it is hard at this juncture to make hints towards the timing of the next move. The take home here then is that US data will remain significant in order to track the underlying health of the US economy given the uncertainties surrounding the President-elect and what he will, or will not, be able to push through once inaugurated later this week.

Elsewhere, Theresa May remains busy having delivered a keynote speech at the World Economic Forum in Davos. However, the address was fairly vanilla and given this comes just 48 hours after her Brexit speech it was unsurprising to see little reaction in the market.

 

The Day Ahead

Today is very much a game of two halves in that the US trading hours should be a much more lively affair. Although we have a slew of economic data as 1.30pm (weekly jobless claims, building permits, housing start, Philly Fed manufacturing) it may well be superseded by the press conference from ECB President Mario Draghi. Much like everyone else I am not expecting a great deal to come of today’s event given the context that this is really a ‘hold’ meeting given the changes in policy that were announced in December. However, the one area of potential interest will be in rising inflation cross the Euro-zone and in particular Germany. Area’s such as Brexit, Trump, and Italian banks are likely to be put forth by the press but I would imagine Draghi will avoid getting into any type of political debate or bias on these issues.

Looking at EUR/USD we prefer to be on the buy side today given the context of the weaker USD (DXY -0.2%) and with a Bloomberg source report circulating suggesting that the ECB are lacking an agreement on buying bonds below the deposit floor. This with a more sound technical set-up to enter the market looks attractive. Meanwhile, with the S&P not having seen a down day of more than 1% for 66 consecutive sessions we maintain our view of being long US equities as a direction, which consequently leads us to a short in T-notes. Finally, the API inventory data released last night saw a extremely large build overnight (+9.75mln) but was somewhat negated by a draw of just over 5mln in the headline crude figure, with Cushing coming in at a twice a larger draw than expected at -1mln. This in combination with the continued commitment of OPEC members to adhere to predefined quota gives us the belief that crude can remain supported today.