Moderate gains on the US stock markets

Market movers today

• We expect the ECB to announce government bond purchases of EUR750bn today. This would be slightly positive for the market, where consensus for purchases seems to be building somewhere around EUR500-600bn. While the aggregate headline figure is the focal point for the market, the pace is more important in our view, as the aggregate size and composition are likely to be altered along the way.

• There will be focus on the possible reaction from Danmarks Nationalbank (DN) to the ECB’s announcement. We expect DN to cut the key policy rate by 10bp to minus 0.30% at 16:00 CET to cap further EUR/DKK downside.

• The ECB announcement is likely to overshadow all other releases on the day, which include US initial jobless claims, expected to decline to 300K, and the November FHFA house price index, which is expected to show a continued gradual increase in US house prices.

Selected market news

Yesterday we saw moderate gains on the US stock markets and this morning the Asian stock markets are mostly flat ahead of today’s key decision from the ECB.

Market expectations about a large quantitative easing programme from the ECB have been building and yesterday international media reports created some market action suggesting a fairly sizable QE programme compared to the market consensus, cf. below. The EUR is now approaching the weakest level against the USD in 11 years on the back of these expectations.

A notable development in recent days has been a pick-up in the European bond markets’ inflation expectations. This is an indication that the markets are getting more optimistic that the ECB will introduce a sizable and bigger QE programme than earlier expected. That said, market inflation expectations remain at historically low levels. Whether the ECB will be able to lift inflation expectations further today will be a key factor in determining the success of the programme.

Yesterday the Bank of Canada surprised markets by cutting its key policy rate by 25bp to 0.75%. It was the BoC’s first rate cut since 2010 and the surprise move sent the CAD weaker overnight. The decision comes on the back of the sharply lower oil price, which is putting downward pressure on the oil-exporting Canadian economy.