Upbeat Draghi [Video]

The Day So Far…

The introductory speech from ECB’s Mario Draghi at the ECB Forum in Portugal has been the main market moving event of the morning. Despite the President defending the central bank’s stimulative policies yesterday, Draghi sounded decidedly more upbeat today, stating that “all signs now point to a strengthening and broadening recovery in the euro area”, adding that “deflationary forces have been replaced by reflationary ones”. This surprisingly hawkish tone saw EUR futures vault yesterday’s high which the DAX coming under pressure on the premise that such accommodative policies would soon be ending.

The subtle changes in Central Bank language of late has been interesting as both the ECB and the Fed are keen to normalise policy but do so with the knowledge that going to fast would destabilise the on-going economic recovery. This situation is all the more complicated in the case of the Bank of England where inflation is at multi-year highs but consumer confidence is at its lowest point since the immediate aftermath of the EU referendum. The one thing this does create is short-term volatility as central banks try to manage market expectations, and much like Draghi’s speech earlier today, I would be looking for potential market moving commentary from the plethora of speakers on the docket including not only the head of the ECB but also BoE governor Mark Carney and Fed Chair Janet Yellen.

A quick look elsewhere and gold has reversed a majority of the ‘fat-finger’ loses seen yesterday which looks to be more a natural retracement of the move rather than anything fundamental. Meanwhile, in the crude market despite the small advance made this morning it is worth noting that Libya has added a further 50kbpd of crude in just the last week bringing their total production to 935kbpd, according to an informed source.

The Day Ahead…

US consumer confidence and Richmond Fed Manufacturing are both due out at 3pm London time but as mentioned above these are likely to be overshadowed by the number of influential speakers from across the major central banks. One reminder with the data is that from a release point of view the Richmond number can come out up to a full minute early.

For the strategy we remain prefer long positions in EUR/USD in the context of the commentary this morning while also looking for technically sound entry points to re-enter a long position in the S&P given the propensity for the market to spring back after a down day in the US. Consequently we anticipate US yields to remain on the front foot and still feel the negative fundamentals will cap any advance in crude oil.