ECB in focus, as Germany adds €130bn fiscal stimulus

Global equity markets continued their upward progress yesterday, buoyed by the prospect of further monetary as well as fiscal stimulus, along with optimism over the gradual easing of lockdowns, as the losses that we’ve seen since March continue to get chipped away.

The German DAX has managed to reverse 75% of its losses, breaking above the 200-day MA for the first time since 26th February, and prompting a sharp move higher. Not to be outdone the Nasdaq managed to post a new all-time high, as the gap between Wall Street and Main Street became a chasm.

In terms of performance the FTSE100 has largely underperformed, it is down 15% year to date, compared to the DAX which is down 5%, while the S&P500 is down a mere 3%.

It seems almost surreal that at a time when the US is facing its highest unemployment rate in decades, that US stocks are retesting, and in some cases setting new all-time highs.

While a lot of the recent rebound in stock markets is down to optimism that the worst in terms of economic damage may be in the rear-view mirror, even if the visibility on the data is not, there have also been some data surprises which have encouraged this view.

We’ve seen gradual improvements in the services data, while yesterday’s ADP employment report for May can be treated as a particular case in point, and serves as an example that if you set your expectations low enough then even a less awful number can be treated as a positive.

Expectations were for 9m jobs to be lost in May; however, the actual number came in at 2.76m jobs, which while still bad, was a much better number than expected. The April number was also revised slightly lower. One reason for the much smaller than expected number was probably the result of some states and businesses reopening and furloughed workers returning to work.

This does offer encouragement that the economic fallout may not be as bad as feared, however it doesn’t mean that it still won’t be enormously painful for a lot of people.

Last night the German coalition government managed to agree on a €130bn fiscal stimulus program for the German economy, which combined with an expectation today that the European Central Bank will signal its intention to add to its current €750bn PEPP program when they meet later today.

The general consensus is that while interest rates will be left on hold, the ECB will increase the current program by another €500-€750bn, as well as extending the horizon of the current program beyond October, with the latest macro-economic projections likely to make for grim reading.

Coming as it does in the aftermath of the EU’s proposed €750bn recovery plan, it’s probably not too surprising that equity markets are getting a little ahead of themselves.

The biggest risk here is that the ECB under delivers on expectations, given that it needs to tread carefully, especially given the recent German constitutional court ruling.

As things stand, the ECB haven’t used all the current €750bn which means, as things stand, they still have considerable headroom, which means they don’t need to rush. A number of members of the Governing Council have expressed reservations about the ECB trying to do too much, too soon. This could mean that the ECB could exercise caution, and merely extend the current program beyond October, and wait and see whether it is necessary to commit to further amounts, as and when the data warrants.

The ECB is under the spotlight as never before, and it may feel that with the current measures being implemented by governments, and some improvements in the data, that waiting to the next meeting might be more prudent, especially since it needs to convince the German courts its old asset purchase program was within the rules. This is particularly important given that the current program probably isn’t if subjected to the same level of scrutiny as the old one, given its looser conditions and criteria.

The tone of Christine Lagarde’s press conference is also likely to be instructive in how the ECB intends to respond to the German court ruling, along with its guidance as to how any new stimulus will be implemented.  

Yesterday’s ADP payrolls report was surprising in how low the May number was in terms of the number of job losses. Last week US continuing claims also showed a surprise drop so maybe there is a case for saying that the data can only improve from here on in. That’s likely to be of small comfort to the number of Americans that make up today’s latest weekly jobless claims numbers, and we now have the added complication that the unrest in US cities could make the economic damage even worse, and much more difficult to recover from.

This week claims are expected to come in at 1.8m, down from 2.1m, however the continuing claims could well be instructive given the sharp fall last week. These are expected to come in at the 20m level, a decline of 1m from the week before.   

EUR/USD – continues to push higher with the previous highs this year at 1.1495 the next target. Pullbacks need to hold above the 1.1170 area for this to unfold. Below 1.1160 opens up last week’s breakout area at 1.1035.

GBP/USD – continues to close in on the 200-day MA and the recent highs at 1.2650. A move through 1.2650 opens up a return to the 1.2740 area. Trend line support from the March lows remains back down near the 1.2240 level.

EUR/GBP – found support near the 0.8870 level earlier this week after the sharp decline from last week’s high at 0.9050. A fall below 0.8870 is needed to open up a move to the 0.8740 area.

USD/JPY – the move through the 200-day MA opens up the 109.30 area, and April peaks. The 108.30 area should now act as support for a return towards the recent range highs, above 109.30 and towards 110.00.  

FTSE100 is expected to open 6 points lower at 6,376

DAX is expected to open unchanged at 12,487

CAC40 is expected to open 6 points lower at 5,016