Europe
A leaked ECB report suggesting quantitative easing at a rate of €50bn per month for a year starting in March sent shares in Europe chopping around violently on Wednesday as tensions grow leading into the final announcement on Thursday afternoon.
Even Super Mario the plumber couldn’t prevent all the leaks from the ECB this week. Everybody from unknown sources to governing council members to national leaders have been espousing knowledge of what’s coming in the ECB announcement.
Expectations for tomorrow’s ECB meeting have been built up to such a degree that it’s become very questionable whether it’s possible for President Draghi to meet them.
The situation with the Swiss franc has raised the stakes even more for Mr Draghi; the surprise removal of the euro-franc peg has given rise to scepticism of central bank creditability.
When Mr Draghi first started hinting at asset purchases, he may have thought the Eurozone economy would turn around and inflation would pick up before he had to do anything. Inflation dropped and his hand was forced into ABS and covered bond purchases. Inflation has since become deflation and Draghi is backed into a corner; he has stated on numerous occasions that QE won’t do the job at fixing the Eurozone without structural reforms but failure to act now would risk all his credibility.
UK unemployment rate has dropped to 5.8% while wage growth remained steady at 1.7% year-over-year but the important takeaway for markets was a change in voting patterns of the two Bank of England dissenters.
UK shares popped and the British pound dropped when the two Bank of England officials who had been voting for higher interest rates in the UK changed their minds and voted in consensus to keep rates on hold at 0.5%.
The argument from dissenting BOE members Weale and McCafferty had been that rates need to normalise pre-empting a rise in inflation. A change in voting patterns was an increasing possibility given inflation has fallen back in the last few months and is now well below the bank’s 2% target.
The idea behind dissenting was to catch inflation before the cat gets out of the bag but with CPI at 0.5% YoY, the cat looks like it’s settling down in the bag for a snooze.
House builders Barratt Developments Plc (LONDON:BDEV) andIntu Properties Plc (LONDON:INTUP) cheered the implication of the Bank of England decision for lower mortgage rates. Banks had already been pre-empting the BOE decision after the latest inflation data by offering record low fixed-term mortgages and this trend looks set to continue.
Gold prices ramped further upwards on Wednesday touching $1,300 per oz. but mining companies including Glencore Xstrata Plc (LONDON:GLEN) and Anglo American took their lead from copper prices which after a brief recovery appear to be heading south again alongside global growth forecasts.
Sports Direct Intl Plc (LONDON:SPD) shares plunged on the news the company’s high-profile founder Mike Ashley sold shares. Ashley is presumably raising cash from a share sale after repeated failed attempts to have the company pay him a bonus.
Shares in Pearson were topping UK indices by afternoon trading after the publisher upped its guidance for 2015.
US
It was a lacklustre start for US markets that caught some of the volatility from the leaked ECB policy but were essentially flat by mid-morning trading.
Netflix Inc (NASDAQ:NFLX) shares rallied by as much as 16% to over $400 on Tuesday thanks to quarterly profits easily beating expectations. The key support level around $320 may still be at risk when greater scrutiny of the numbers shows all of the profit gain above expectations for Netflix was due to a one off tax adjustment. The online video streaming company guided earnings expectations lower for the first quarter of 2015.
International Business Machines (LONDON:IBMI) shares traded lower after the company missed revenues estimates while Advanced Micro Devices Inc (NASDAQ:AMD) meeting expectations was well received pushing shares higher.
FX
The US dollar was mixed on Wednesday ahead of the ECB policy announcement on Thursday.
The bigger surprise came from north of the Border when the Bank of Canada surprised markets by cutting interest rates. USD/CAD rallied 1.5% surpassing 1.23 as price action starts to get distinctly ruble-esque with falling oil prices really hitting the Canadian economy.
The currency war is now on solid footing with central banks capitulating to low inflation across the globe, the only remaining domino to fall is the US Federal Reserve. As soon as the Fed gives up on a rate-hike this year, it’s a central bank race to the bottom.
Commodities
Crude oil rallied by 3% after failing to push below $46 the January 16 low in WTI as BHP Billiton, a large investor in US oil sands said it will reduce the number of rigs by 40% over the next year. Evidence is starting to mount that shale oil production in the US is untenable at current price levels and will have to come down to match demand.
A flight to quality ahead of potential QE from the ECB has seen gold rally to $1,300 per oz. but has since undergone a needed pullback from the big round number.
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