Risk appetite continues to shine and the US is leading the charge with the S&P and Dow once again trading to record intraday highs as Trump fever drives positivity. The Dow was up over 1.5%, while the S&P was up over 1.3%. It was also a positive close in Europe yesterday, and overnight in Asian trading the Nikkei traded to its highest level since last December. In currency markets the Euro traded higher on the day with EURUSD testing back above 1.2600 once again, while the EURGBP found some footing above .8500 area. Sterling found itself wanting some as industrial and manufacturing production data missed to the downside, GBPUSD also declined throughout much of the morning, before recovering through the US session and then starting this morning on a firmer footing. The greenback has found itself under some selling pressure as treasury yields come off, the USD index now sitting just above some key support.
It really is all about the ECB today, and while no action is expected at today’s meeting with rates and QE held at €80bln, markets have now almost fully priced in expectations the Mario Draghi will announce the ECB’s plan to extend and broaden asset purchases next year. The Eurozone has certainly seen inflation firm up since the originally introduced their QE program in 2015, last month hitting .6% and the highest level in almost three years but the rate still sits well below the ECB’s 2% target. Given the current duration of the ECB’s program, and the expected end date of March, many feel the ECB will have to act further and this would likely mean the broadening of scope of assets eligible for the ECB to purchase, or perhaps a scrapping of the restrictions on bond purchases with yields below -.4%. The Euro has faced downside for a period in the buildup to this meeting and what we often see is that the market expectations do not match the ECB’s ability/appetite to expand. We also expect updated inflation forecasts and while the ECB will likely continue with QE until price growth is on a more assured path, a firmer inflation outlook may well see that path shorter than the market expects.