Stan Shamu for Chris Weston, Chief Market Strategist at IG Markets
The aftermath of the ECB meeting has not quite been as euphoric as some had expected with most of the key Asian markets actually trading lower. Apart from the ASX 200, the other major bourses are struggling. The Nikkei, Hang Seng and Shanghai Composite are all weaker. By now the details of the ECB meeting have been well documented and the market has had some time to digest the outcome. It seems the market feels some of the key measures will take time to filter through the system. Some analysts actually feel the practical impact of negative deposit rates will be relatively benign given already low levels of excess reserves.
Additionally, the LTRO will only take place in September and December which is still a bit further down the track. Meanwhile euro weakness didn’t last long at all and considering Draghi has already flagged exchange rate strength as one of the key challenges for the region, then this move is not what officials would have wanted to see. A consolation is that the commentary itself was dovish with Draghi pledging to keep rates low for even longer and not ruling out the possibility of further action.
USD in focus ahead of payrolls data
European markets are facing a firmer open and are likely to continue riding the positive momentum from the ECB meeting. There is more activity on the European calendar today with German trade balance, industrial production, French government balance and trade balance due out. No big moves in EUR/USD are expected from these releases but attention will shift to the other side of the equation with US non-farm payrolls due out.
After a fairly strong start to the week, the USD has given up some ground as we approach the key data. The market now looks ahead to US non-farm payrolls data for May, which is the other key event of the week. Expectations are for 215,000 jobs to be added and for the unemployment rate to tick higher to 6.4%. While jobs added will be the key reading, it’s also important to keep an eye on labour cost inflation. Needless to say a strong reading tonight could see EUR/USD swiftly reverse the gains it has made post the ECB meeting. While the pair has exhibited some strength since the meeting, I feel this merely presents fresh selling opportunities at higher levels. The 200-day moving average comes in just short of 1.3700 and I feel it’ll present some resistance. Perhaps some offers will start coming in at around those levels.
ASX 200 leads Asia
The ASX 200 has finally actually managed to outperform the region today with the banks once again coming to the rescue. With a round of measures announced by the ECB, investors certainly feel the financial names will be in a good position to benefit from this. The LTROs in particular which are aimed at supplying cheaper funds to the banks tend to be a drawcard.
This LTRO is focused on boosting household consumption and business investment; these tend to be key growth drivers all round. All the big four banks are at least 1% firmer and investment group Macquarie has surged over 2%. This has really underpinned the local market’s gains today as the other sectors remain quite choppy. The materials space is mixed with the iron ore miners just continuing to struggle to gain traction. Any gains are being used as an opportunity to sell by investors at the moment, particularly in the pure plays where FMG and AGO have continued to extend losses. Gold stocks have been a bright spot after the precious metal finally snapped its losing streak following the ECB meeting. RSG, MML, TRY and KCN have all gained over 4% each. In the energy space, Oil Search and Santos have extended their gains as investors bet on output upside potential from PNG LNG.