Summary
The euro’s slump despite a strong bid before Thursday’s ECB statement looks positive for stock markets in coming weeks.
Mario Draghi’s aptitude at teasing different nuances from virtually identical comments was on show on Thursday.
First, hair-splitting focused on 'at least through the summer of 2019'. Draghi duly confirmed it meant ‘till the autumn’, but a new inflection was introduced. Previously, the phrase was followed by: 'for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path'. This time, ;current expectation' was deleted before this amendment: 'for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.'
The edit suggests slightly higher confidence. Recovery toward target is no longer just ‘expected’, it’s happening. With the euro down 70-odd pips from early highs, the implication was too subtle for the market, or simply ignored. Either way, the central bank left the door open for bulls, but they stayed in the pen.
U.S. growth data may cap euro again
This bodes ill for the single currency’s reaction to Friday’s U.S. growth readings and in turn, that is a positive hint for stocks. Like numerous data points over the last few months, a GDP surprise that strains to the upside seems a higher risk than normal. If the print is in line with robust inflation, labour and output, the euro may not immediately seek out $1.16 from earlier in the month. But that’s chiefly because of protracted selling and crowded positioning after a year of compression.
Our best guess is that any snap higher to realise gains will be limited to Thursday’s highs. Magnetic attraction towards last week’s $1.572 spike low will follow.
Car stocks could accelerate if GDP strong
Recent misgivings about yield curve flattening could be aired again if advance GDP prints above expectations. Still, the highest short-term yields in a decade were seen this week and they did not preclude strong stock market gains.
Furthermore, investors’ take on rising rate expectations is less anxious than in the spring. If we’re correct, concomitant pressure on riskier assets, like shares, will alleviate further, and not exclusively in the eurozone. For one reason, European investors will lap up the widening U.S.-EU rate differential after an obstacle strewn few weeks. For another, global auto stocks will be among preeminent beneficiaries from positive GDP optics. The sector could then extend this week’s relief from hints of an improved trade outlook.
Overall cheer is already helping U.S. stocks weather decelerate Facebook (NASDAQ:FB) growth. Amazon (NASDAQ:AMZN) earnings are due after U.S. markets close. If bereft of the wrong kind of drama, global shares could enjoy an even stronger close of the week.
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