• AM Bulletin: ECB meeting in focus

    Indices Update

    Trade was mixed on the open, reflecting the caution felt amongst investors ahead of today’s ECB meeting.

    It was also a quiet start to yesterday’s session. European indices were a touch firmer despite a sell-off in Asian Pacific stock markets. Oil was little-changed and the dollar was moderately higher. However, as the US open approached European equities and US stock index futures were significantly firmer. The euro was lower against the US dollar, sterling and yen and oil was back in positive territory with Brent trading north of $40 per barrel. It felt as if position squaring ahead of today’s ECB meeting was over. Instead, investors were prepared to bet on the ECB coming up with the goods and announcing another significant boost to its already substantial stimulus programme. How brave.

    We’ll find out soon enough what the ECB’s Governing Council managed to agree on as they struggle to counter tepid growth and deflationary pressures across the Euro zone. If they deliver all that Mario Draghi has repeatedly hinted at then we can expect the euro to head lower and equities to continue to rally – for a while at least. However, there is a limit to what ever-looser monetary policy can achieve and we’re rapidly approaching the tipping point. Just consider how the Japanese yen rallied following the Bank of Japan’s surprise decision to take interest rates negative. That was certainly not the desired outcome.

    - The FTSE 100 index closed at 6,146.3 up 20.9 points on the day, or +0.3%.

    - The German DAX rose 30.3 points or 0.3% to finish at 9,723.1

    - The US30 closed up 36.3 points to finish at 17,000.4 The S&P 500 rose 0.5% to close at 1,989.3 while the Nasdaq 100 rose 0.7% to close at 4,293.2

    Equities Update
    The Restaurant Group, owner of Frankie & Benny’s, Garfunkel’s and Chiquito, said it would struggle to add sales this year as consumers become more wary about spending money. The company also blamed falling footfall at shopping venues due to the rise of internet shopping, a lack of big blockbuster films which typically drove customers to their outlets and stiff competition from rivals. Pre-tax profits for the 12 months to the end of December increased to £86.8 million from £78.1 million a year earlier, an increase of 11%, as sales rose by 8% to £685 million. The stock ended down 22.7% at 420 pence.

    Commodities Update

    Crude oil rallied ahead of yesterday’s US open and the near-month Brent contract pushed back above $40 per barrel. There was no obvious catalyst for the move higher; it was just part of the general ebb and flow of trading. The US dollar was firmer, so that was hardly supportive. However, bulls continue to take heart from the possibility of OPEC and non-OPEC oil producers agreeing to an output freeze at a meeting apparently scheduled for 20th March. Most oil analysts insist that only an outright cut will do anything to rebalance the current dynamic of supply outstripping demand. But this fact is currently being ignored, as is Kuwait’s insistence that it won’t be party to any agreement to freeze output unless Iran is included – something that doesn’t look remotely likely.

    Oil is currently experiencing a corrective rally following its multi-year decline, and it could have further to go. Looking at the chart for Brent: there’s some light resistance around $42 and then at $44. Meanwhile $38 is the main upside barrier for WTI followed by $40. It is climbing a “wall of worry” to some extent. As the price creeps higher we can expect US shale producers to restart previously unprofitable mothballed rigs and so add to supply. However, that development would be picked up by the industry very quickly and prices would adjust down accordingly. Another upside barrier for the oil price will be when US producers begin to hedge output through the futures market, effectively locking in a guaranteed price for current production. That hasn’t happened yet, but could well begin if WTI breaks back above $40.

    Gold fell sharply yesterday and was down over 1% soon after the US open. The move looked largely technical and spurred by the general “risk-on” move in equities and oil. The US dollar was a touch firmer, and this could also take some of the blame for the sell-off. However, it’s probably wrong to pay much attention to the dollar as gold has done its own thing recently, generally ignoring movements in the greenback. Support for gold comes in around $1,240. This area acted as resistance throughout the second half of February. If gold can hold above here on a closing basis then the technical picture remains bullish. However, a significant downside break would open up the possibility of a retrace to $1,200 in the near-term and $1,180 thereafter.

    Silver largely ignored the move in gold although it’s worth remembering that it fell sharply on Tuesday as traders took profits after China’s poor trade numbers. It looks as if the area around $15.20 is currently offering support.

    Forex Update

    Yesterday brought another mixed session for currencies. There was relatively little movement in the EURUSD ahead of today’s ECB meeting. Traders in the world’s most important currency pair opted to ignore the “risk on” moves in oil and US and European equity markets. Nevertheless, there was some significant movement in other currencies. The Japanese yen gave back a fair proportion of its gains from Tuesday. This was nothing more than the reestablishment of carry trades as risk appetite improved. The Canadian dollar rallied sharply after the Bank of Canada left its headline Overnight Rate unchanged at 0.5%. There had been some speculation of a cut. The currency also continues to benefit from the turnaround in oil. It is up around 10% against the greenback since the 20th January when crude hit multi-year lows.

    Meanwhile, the Aussie dollar continues to push upwards. This is another commodity currency which has rallied sharply since oil hit its low point on 20th January. Of course, Australia doesn’t really have much of an oil industry left. However, it got caught up in the general risk-on, commodity related bounce. In addition, the Reserve Bank of Australia has resolutely held off from cutting the Cash Rate from its current 2% level, despite considerable pressure as China’s economic slowdown took hold. This looks like being a good decision as there are signs that the Australian economy is steadily improving.

    Upcoming events

    Today’s key economic event is the ECB rate decision and Mario Draghi’s subsequent press conference. From the US we have Weekly Jobless Claims and the Federal Budget Balance.

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