DE30: Stocks trade higher awaiting ECB stimulus

Summary:

• The beginning to Thursday’s trading has been positive with the largest gains seen in France
• ECB meeting could set the trend across European stock markets
• Deutsche Boerse gains as adjusted EBIT meets estimates

It’s the ECB day and there is no doubt that this event will affect prices of various assets. However, the degree to which the ECB decision will influence prices of particular assets will depend on what the central bank will communicate. Some market observers do not even rule out a so-called bazooka option - the ECB announces it starts/considers buying shares of Eurozone companies. But, it could face some legal hurdles and given the fact that retail investors in EMU countries do not account for a large share in a total number of investors, the ECB could be sceptical of resorting to this a Japanese-style option. This share, on average, is much lesser compared to the US or the UK, thus the wealth effect impact on consumers should be moderate. Moreover, looking at what the Bank of Japan has done in its domestic ETFs market the ECB could draw conclusions that this option is not even worth considering. Anyway, we have a lot of other options being in the hands of the European Central Bank: 

• government bond purchases, 

• corporate bond purchases, 

• a so-called twist operation in which the ECB reinvests proceeds from maturing debt in bonds from the longer-end of the yield curve,

• increasing the average duration of bonds beyond the current limit of 31 years (this option could face a backlash from Germany as the German govt has not issued much debt with maturity exceeding 31 years),

• Raising its limits regarding how much of debt of a single issue/issuer the ECB can hold.

These are only the most possible options and they should be enough for Mario Draghi before his tenure ends this fall. However, when Christine Lagarde begins her reign and the Eurozone economy fails to resurrect over the next couple of months, even more unorthodox options could be under consideration. Either way, we think that monetary policy itself cannot be responsible for addressing each economic slowdown/downturn and fiscal policy could participate on an equal footing. This is especially true at a time when fiscal balances have improved markedly in many European economies as evidenced by primary balances.

The key question for stock investors is whether all of dovish options have been already priced in - the German DAX has seen notable increases in rent days fuelling by… gloomy data strengthening the case for immediate monetary easing. Technically the DE30 is retreating from the resistance at around 12 570 points and it could head down toward the lower boundary of the bullish channel. Source: xStation5

In terms of information from companies it is worth mentioning Deutsche Boerse shares being among the best performing stocks. This result came after the company reported earnings meeting expectations - adjusted EBIT for Q2 was 410.8 million EUR compared to the median estimate of 410.3 million EUR and net revenue was 724.8 million EUR compared to 725.4 million EUR expected.

Deutsche Boerse shares are among the leaders within the DE30 on Thursday. Source: Bloomberg