US stocks finished mixed on Wednesday with the Dow Jones Industrial Average lifted by better than expected earnings from Boeing (N:BA) while the S&P 500 and Nasdaq were weighed down by healthcare stocks with Valeant Pharmaceuticals International Inc (N:VRX) falling 19%.
Shares in Europe have chopped around in a narrow range ahead of today’s European Central Bank monetary policy meeting with a lower open expected on Thursday.
Belief that policymakers will add to current stimulus efforts have gradually faded since Governing council member Ewald Nowotny said euro area inflation is “clearly missing” the ECB’s target. Christian Noyer’s submission that the current QE is “well calibrated” is probably a better reflection of opinion on the governing council.
A change to QE can really take three forms; increasing the size of asset purchases, increasing the length of the program or adding new assets to the mix such as corporate bonds. It is ten months until the program is scheduled to end so increasing the length of the program seems rather premature.
Europe’s corporate bond market is not as deep as in the US with most companies traditionally favouring bank lending.Adding corporate bonds to the mix would probably work more as a signal of dovish intent than for any real impact on yields or the euro. If the ECB decided to buy shares or ETFs like the Bank of Japan, that would be a game changer and we’d be off to the races in European equities, but chances are slim.
Increasing the size of the program would probably put the most downward pressure on the euro of all the likely options. However, the ECB runs the risk of crowding out private bondholders with more purchases, and would add to exit risks once the program finishes.
ECB president Mario Draghi and cohorts will have been keeping a close watch on the recovery in the euro since bottoming in the first quarter, but will still likely be satisfied with current levels compared to a year ago.
The ECB’s quarterly credit report suggested credit conditions are easing for businesses and this will likely be used as evidence that the program is beginning to work, but that more time is needed to see further improvement.
EUR/USD has been stalling at 1.15 and Mr Draghi will do his best to keep it that way. Without announcing further policy measures, this will have to be achieved through dovish rhetoric including an emphasis on “downside risks” to growth and inflation forecasts. There’s an outside chance Mr Draghi raises the possibility of lowering the deposit rate.
With an absence of economic data, the dollar has strengthened this week as the euro fell, but this dynamic could change once the ECB meeting is out of the way and markets refocus on next week’s Fed meeting.
The British pound was largely unmoved by BOE governor Mark Carney’s veiled support for Britain in the Europe. UK retail sales reported on Thursday are expected to pick up in September to 4.7% YoY.
EURUSD – Since sliding almost 200 pips from 1.15, the euro has treaded water between 1.13 and 1.14 this week. A return to former support at 1.11 is the default assumption unless there is a weekly close above 1.15.
GBPUSD – The pound has been oscillating beneath 1.15 and the declining trendline that connects the Aug 25 and Sept 18peaks. A break of a corresponding RSI trendline would suggest price may be about to follow suit.
EURGBP – Euro-Sterling has bounced off three week lows and 0.73 but the break of the Oct 7 low and failure to break 0.75 would suggest further downside.
USDJPY – the dollar yen popped back above 120 again on Wednesday so now sits in the middle of its two-month old trading range between 118 and 121.
Equity market calls
FTSE100: to open 27 points lower at 6,321
DAX: to open 38 points lower at 10,200
CAC40: to open 24 points lower at 4,671
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