Draghi's dovish message gives markets a massive boost

Good morning,

• Draghi’s dovish message gives markets a massive boost;

• PBOC surprise stimulus helps extend gains, while the aussie and commodities also rally;

• Quiet end to the week seen with no major announcements scheduled.

What was initially looking like a quiet day for the financial markets due to the lack of scheduled economic events has become a lot more interesting thanks to some dovish sounding comments from European Central Bank President Mario Draghi and surprise stimulus from the People’s Bank of China.

European markets got off to a strong start on Friday as ECB President Mario Draghi delivered an unusually strong dovish message on monetary policy. Every time Draghi speaks he seems to say the same thing, the central bank stands ready to act, it will consider all unconventional measures, quantitative easing is a possibility. While this tends to get the markets excited, his comments last night were much more dovish.

Draghi’s comments about the increasingly challenging fight against deflation strongly suggest that the ECB is going to have to do more. While speculation is rife in the markets that QE will happen at some point, I remain unconvinced, although the ECB is surely running out of other options. The other attempts this year don’t seem to have done much, with inflation remaining well below the 2% target and dangerously close to deflation levels. I think we could see another round of stimulus announced in the next couple of months in an attempt to grow the balance sheet to €2 trillion but I think they will explore other unconventional tools.

The markets were given another helping hand mid-way through the morning of the European session by a surprising announcement from the People’s Bank of China that it is cutting interest rates. There has been a lot of talk recently about the potential for the PBOC to do more targeted stimulus in order to fight back against the slowing economy, and there were rumours over night that it may be about to inject a large sum into the financial system, but no one expected a broad based interest rate cut.

The FTSE got a big boost from the announcement due to its exposure to China, while the Australian dollar also spiked along with commodities. Falling Chinese demand has been partly behind the decline in commodity prices and the Australian dollar, as the country exports a significant amount of raw materials to China, so it’s no surprise to see these benefiting from this surprise rate cut.

Barring any further surprise announcements, the rest of the day is looking a little quiet with nothing major on off in terms of economic data. I expect to see another response to the Chinese rate cut around the US open as investors in the US respond to the news but aside from that, it may be a calm start to the weekend.

The S&P is expected to open 13 points higher, the Dow 114 points higher and the Nasdaq 30 points higher.