Stocks soar as Draghi and Trump attempt to steal Fed's thunder

Summary:

• Draghi hints at more ECB stimulus

• Trump tweet hints at China breakthrough

• DE30: German car sales surprise in May

• Zew economic sentiment disappoints

• Fed preview video

The start of the week had a feeling that the markets were in a wait-and-see mode ahead of Wednesday’s Fed rate decision with traders eagerly anticipating a policy update as speculation mounts that the US central bank are set to begin cutting rates for the first time in over a decade. However, there’s been a flurry of activity this morning as ECB president Draghi has threatened to steal the Fed’s thunder with a strongly dovish message of his own.

Mr Draghi has underlined his readiness to take further action to stimulate the eurozone economy during a speech in Sintra and there’s been a notable reaction in the market with the single currency dropping back and stocks on the continent rallying. The markets are now pricing in a 10 basis point cut before the end of the year and it seems that once more we’re getting a concerted effort from major central banks to prop up the global economy.

The move lower in the Euro after Daghi’s remarks attracted the attention of Donald Trump and not to be outdone, the US president not made his own market moving announcement a few hours later. He tweeted “Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talking prior to our meeting.” This sparked another flurry of buying in stocks as traders began to bet that this means a breakthrough in the US-China trade tensions is imminent. On the European cloe the German Dax is higher by 2% and the S&P500 by just under 1%.   

The European Automobile Manufacturers’ Association published the car sales figures for May today and they showed quite a surprising improvement. European car sales in May reached 1.44 million cars marking a 0.04% YoY increase. The increase may look insignificant but it is actually significant given the recent data. Namely, European car sales showed declines for the past three quarters and reading for May is the first one in nine months to show an improvement. UK experienced another slump (-4.6% YoY) as Brexit continued to discourage consumers from bigger purchases. However, sales on Europe’s biggest market for cars - Germany - jumped 9.1% YoY. Incentives offered by carmakers for switching from older diesel cars to “cleaner” models are said to have played a big role there. BMW (BMW.DE) was among companies that saw the biggest increases as its sales jumped 8% YoY in the previous month.

Not long after the Draghi remarks, there was the release of the latest German ZEW economic sentiment which showed a far worse than expected reading. The print of -20.2 was well below the -3.6 consensus forecast and marked a sharp drop on the -1.6 seen previously. What is more, after 3 consecutive beats this indicator has now missed estimates in the past 2 releases and seems to be starting to disappoint once more. This data has done little to cap the advance seen in the Dax, with the market potentially now seeing bad news as good, with the proviso that a worsening economy will cause the ECB to deliver further stimulus.

Today has been a busy one for the markets with lots of sizable moves, but these could be just a precursor of what is to come with tomorrow’s Fed decision one of the highlights of the month. Watch our short video previewing the event here.