Markets await Draghi
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
If yesterday?s hearsay from unnamed ECB sources is anywhere near close to being accurate then it?s certainly building up expectations as to what President Draghi has to say at today?s press conference, with the hope that the reality matches yesterday?s raised expectations..
The new program leaked yesterday has been dubbed ?Monetary Outright Transactions? (MOT), which I?m sure will no doubt attract jokes about dodgy MOT?s, and looks set to outline a plan that will allow the ECB to purchase unlimited quantities of Spanish and Italian bonds of up to a three year duration, and will be offset or sterilised elsewhere in the financial system, with strict conditionality attached to any purchases.
In essence it seems like a short dated variation of the previous SMP program, but on steroids, and that wasn?t exactly a resounding success.
This, of course would have significant political dangers for the ECB given that if a country decides to renege on its obligations the central bank will be faced with either acquiescing, or pulling the plug and coping with a sovereign default.
The central bank , it is reported, is also set to waive its preferred creditor status on all new purchases, but not on its existing holdings, which could raise questions of how that would work legally, given that to all intents and purposes in a true legal sense, all bonds have the same legal status. How do you differentiate the different tranches?
It remains to be seen what the view of the Bundesbank will be, but it is not hard to imagine, given that they were uncomfortable with the original bond buying program, and Buba Chief Jens Weidmann has been vocal in his opposition to the ECB becoming in any way a ?lender of last resort?, and a financier for governments.
This plan if reports are accurate, stops short of that, but it does appear that the plan may not be using the ESM or EFSF, given that it is unlimited in nature and these two funds have limits set on them.
Talk of an interest rate cut of 25 basis points would appear to be wide of the mark with reports suggesting that there hadn?t been time to discuss this particular option.
In anticipation of action this afternoon, Spanish borrowing costs have been falling sharply in the past couple of days, which is just as well given that this morning Spain holds a bond auction of ?3.5bn of two, three and five year bonds, and will probably get much lower rates than it would have a week ago.
The bid to cover will also be a reliable indicator of investor appetite, though I suspect that external demand could well still be low.
The latest iteration of Eurozone Q2 GDP is also set to be confirmed at -0.2% this morning, confirming a continent wrestling with a myriad of economic problems.
Just before the ECB the Bank of England is also set to announce its latest rate decision, however there are no surprises expected here with 0.5% rates kept unchanged as well as £375bn of asset purchases, also unchanged.
It is also an important day in the US with the latest ADP payrolls number for August which could give vital clues as to tomorrow?s non farm payrolls data, as well as the likelihood of future Fed action at next week?s FOMC meeting. Expectations are for an increase of 140k, down slightly from July?s 163k, while weekly jobless claims are set to rise 370k, down from 374k last week.
EURUSD ? yesterday saw another failed attempt to push above last week?s high at 1.2635, but the dips are getting shallower, suggesting an increased risk of a squeeze towards the June highs at 1.2750.
Key trend line support from the 1.2045 lows now lies at 1.2450, while the key level on a monthly close remains at the 1.2060 level.
GBPUSD ? yesterday we saw cable hit a four month high at 1.5935, however so far we?ve seen a lack of follow through beyond the 1.5910 level and 61.8% retracement of the 1.6305/1.5270 down move.
With trend line support at 1.5835 from the August lows at 1.5490, currently supporting the recent price action the risk of a move towards 1.6060 becomes more probable. .
While unable to break through this level the cable remains at risk of sliding back towards last week?s lows at 1.5765. The long term trend line support lies at 1.5555 from the 1.5240 lows.
EURGBP ? currently trading in a broad range between resistance at 0.7960, which continues to keep a lid on further gains, and support just above the recent lows at 0.7880, we await the next breakout.
A break below the 0.7880 level has the potential to retarget the 0.7820 area, while on the upside a move above 0.7965 targets a move to 0.8000.
USDJPY ? we continue to hold above the 78.10 trend line support from the all-time lows at 75.35.
While below 78.80 the risk of a move back to the range and August lows at 77.80 remains.
Above the 78.80 resistance there is also resistance at the 200 day MA at 79.27 which needs to be overcome to target a return towards the highs last month.
Equity market calls
FTSE100 is expected to open 17 points higher at 5,675
DAX is expected to open 22 points higher at 6,987
CAC40 is expected to open 12 points higher at 3,414
FTSEMib is expected to open 20 points higher at 15,148