Summary:
- European markets open higher ahead of the ECB rate decision
- DAX (DE30) seems to set the stage for price rises
- What to expect from Draghi this afternoon?
Equity markets seem to be in an upbeat mood in anticipation of the European Central Bank rate decision. The beginning of Thursday’s trading has brought widespread, albeit moderate gains with indices in Spain and Italy leading the gains. Let us recall that the European Commission decided on Wednesday to launch the excessive debt procedure against Italy, the first such a situation on record. In the meantime, some comments from Italian officials have been expressed. For example, those from Di Maio do not seem to point to a quick solution of the clash. He openly said that Italy would not heed the EU call for debt cuts adding that the EU made “absurd” requests on investments. On the other hand, he suggested that not all EU parameters must be abolished. In spite of the fact that Italy does not seem to back down on its stance, investors are flowing their money into Italian equities benefiting from a widespread demand for riskier assets in Europe.
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Technically the DE30 seems to be setting the stage for a further increase. Such a conclusion could be drawn from the chart above presenting the H4 time frame. From this standpoint a possible bounce toward 12200 points could be on the cards - a range of the lately broken downward channel. Note that bulls have the strong support around 11920 points. This level is also underpinned by the 50MA. Nonetheless, one needs to be aware that this rosy landscape seen across equity markets in Europe could change this afternoon if the ECB presents a gloomy outlook for economic growth (we think that a positive effect for stocks’ valuation coming from possible lower rates could be overshadowed by a dismal growth outlook leading to lower margins). Source: xStation5
The question for today is what the ECB could do? Three points could be under increased scrutiny this afternoon. Firstly, the ECB is expected to present the details regarding its lately announced TLTRO round. There have been some indications that the ECB will resign from adding a constant spread to the prevailing MRO rate in order to make conditions of its programme more conducive to banks. However, irrespective of what the ECB will do, it should not be a game-changer as the new programme will have a rather small scale (incomparable to the QE). Secondly, new economic projections will be released. There is no doubt the ECB will slash GDP growth forecasts on the back of mounting risks abroad (protectionism, Brexit, Italy) but also due to a sluggish pace of recovery in the European industrial sector. Moreover, inflation projections should also be trimmed to some extent reflecting the weaker demand outlook (paradoxically, it ought to be a welcome news for the ECB lowering odds to get weak GDP growth and high inflation). Thirdly, forward guidance could be altered to reflect a new set of forecasts. In this regard one may expect a reiteration of the ECB’s readiness to act in order to support the economy if needed. This option includes also a possibility of QE resumption.
The DE30 is rising 0.5% in early European trading. Covestro shares are leading the gains though new information has been published from the company. Source: Bloomberg
