With such an extreme shift in sentiment on bond markets in recent weeks, there is always the potential for positioning to become stretched. Whilst there are still negative data points to drag on yields, it means that signs of any positive data have a disproportionately positive impact too. This is what was seen with the positive ISM Non-Manufacturing surprise yesterday. The data caused a significant one day turnaround on yields and the dollar which had been previously reacting to the big negative surprise in the ADP employment change. The move also suggests that the market could be close to a turning point. A lot is being baked into expectation that the Fed will now begin to cut interest rates, but positive data surprises could mean a market seemingly so sure, could begin to question this prospect once more. Yields are beginning to show signs of a degree of stability. Across major forex pairs, the dollar formed some interesting one day reversal signals which suggest all is not lost for the bulls. The importance of Friday’s payrolls report is certainly growing.
The ECB monetary policy decision is the key focus for traders today. The rates decision at 1245BST is not expected to show any changes to the main refinancing rate of 0.0% with the deposit rate expected to remain at -0.4%. The big move in this meeting is likely to come with ECB President Mario Draghi’s press conference at 1330BST. There are several aspects to look out for. Firstly, the economic projections. How will the ECB respond to the escalation of protectionist trade measures which is surely to delay any prospective economic recovery? The ECB’s current economic assessment is likely to remain “tilted to the downside”. Furthermore, with this week’s inflation missing to the downside and the oil price falling sharply in the past month, will this impact negatively on the inflation projections? Slowing growth and sluggish inflation adds up to a dovish leaning ECB. Details of the TLTRO program (first revealed in March and which begins in September) could be announced. If the rates are generous then this would be euro negative and risk positive. Finally, do not expect much with regards to the prospect of tiering the deposit rate in this meeting. Recent commentary has not been favourable on this issue with Governing Council members Weidmann (potentially negative impact) and Villeroy (monetary policy has been favourable for banks). This suggests the clamour for tiering of the deposit rate is not there right now.
Wall Street closed higher for a second day with the S&P 500 +0.8% at 2826. However, this has been tempered slightly today with US futures a shade lower at -0.2%. Asian markets have been mixed to slightly negative, with the Nikkei flat and Shanghai Composite -0.9%. In Europe, the outlook is mixed with FTSE futures +0.1% whilst DAX futures are -0.1%. In forex, USD rebound of late yesterday has stalled a touch today with a mixed look to major pairs. The main mover seems to be JPY which is outperforming today and is a play on trade tensions between the US and Mexico. In commodities, there are slight gains for gold, whilst oil is steady this morning after falling over 3% yesterday on the surprise inventory build in the US.
Aside from the ECB, on the economic calendar traders will be watching for revised Eurozone Q1 GDP at 1000BST which is expected to show no change