The local share market is set to open higher after a solid night on Wall Street and news the European Central Bank will extend its quantitative easing program.
ASX soldiers on, helped by more from Mario
1. QE: While investors are focused on fiscal stimulus in the US and how the suite of proposed fiscal measures can complement already accommodative monetary policy, in Europe we are far from having any sort of fiscal response. This means Mario Draghi and the European Central Bank (ECB) still have a job to do and once again we have seen the central bank change the perimeters accordingly.
The ECB's actions on the face of it initially looked to the market that they were signalling a tapering of its bond buying program, but once everyone had a chance to really sink their teeth into the proposals they found this to be far from true and that the ECB were actually pushing the program out – QEinfinty if you will. Granted, when we get to March 2017 we will see the pace of bond buying drop from €80 billion to €60 billion, but this will go on for a further nine months, not six, as the market expected, so the ECB is now fully focused on the longevity of the program. This means the net effect is €60 billion more bonds purchased than we had expected yesterday.
2. Banks: We have seen a number of the key technicalities (around its program) removed, including the range of bonds they can buy and this will give them greater control of the yield curve. This is very important for European banks, hence European banks flew last night and with talk of late that Italian banks may gain access to the European Stability Mechanism (ESM) I wouldn't be surprised if Italian banks pushed even higher from here.
3. Currencies: We can look at European assets and see a sizeable 15 basis point (bp) increase in the Italian yield curve, with a more modest rise in the German curve (+10bp). EUR/USD initially popped as the algo's reacted to the slower pace of purchases (but the ECB are not tapering), but the pair is back testing the $1.06 level and the ECB, along with the Bank of Japan have pushed EUR as the key funding currency for FX traders (in the carry trade). All European equity bourses have rallied strongly, and one can look at the Italian MIB as a picture of beauty. I am happy to be long this index and accumulate on a pullback, despite genuine solvency, political and credit-rating concerns in Italy.
4. Wall Street: US markets have pushed modestly higher, but US financials have once again been the place to be. Being long US financials has been such a great trade and everyone has filled their boots on "Trumponomics" inspired reflation.
5. ASX: The Australian equity market also looks to be feeding off some of the ECB-inspired inspiration, with an open into 5560 (+0.3%). I am not so sure our domestic banks will be treated in such the same positive way European or US banks were, and a flat open is likely here. BHP should open around 0.5% to 0.7% higher (based on its ADR), but this looks to be supported by higher oil prices, with US crude 2% higher from yesterday's ASX 200 close. We have seen commodity futures under some pressure, with iron ore, steel and coking coal futures down 6.2%, 2.1% and 4.7% respectively. This may take some of the heat out of the materials space.
Our ASX 200 call puts the index up 116 points or 2.1% for the week and if we look at the daily chart of the index it too looks like the bulls are in total control here. A move into the August high of 5611 looks likely given the underlying momentum in markets.
6. Aussie dollar: AUD/USD has seemingly traded in-line with EUR/USD, although while EUR/USD has hugged the $1.0600 level since 03:20 (AEDT), AUD/USD has rallied off it's the post-ECB inspired selloff of $0.7429. Price seems to be happy consolidating in a $0.7500 to $07400 range at present and traders' have the inputs of a weakening Australian growth trajectory, amid views that much of the US tightening is now priced into the USD.
7. Today's dairy:
- Local data: Housing finance October
- Overseas data: China consumer and producer price reports for November; Euro zone trade balance for October; US University of Michigan consumer sentiment for December
8. Market highlights:
- SPI futures up 16 points or 0.3% to 5557
- AUD -0.3% to 74.54 US cents
- On Wall St, Dow +0.4%, S&P 500 +0.1%, Nasdaq +0.2%
- In New York, BHP +0.8% (+52% year to date), Rio +1.6% (45% year to date)
- In Europe, Stoxx 50 +1.4%, FTSE +0.4%, CAC +0.9%, DAX +1.8%
- Spot gold -0.3% to $US1170.73 an ounce
- Brent crude +1.1% to $US53.57 a barrel
- Iron ore dips 47 US cents to $US81.78 a tonne
- LME aluminium bid up 1% to $US1723.50 a tonne
- LME copper -0.1% to $US5782 a tonne
- 10-year bond yield: US 2.40%, Germany 0.38%, Australia 2.73%
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