Macro economics

Analytics on 18/06/2019. Draghi fuels a rally in stock markets

European markets jumped higher on Tuesday after the ECB President Mario Draghi promised stimulus if economic conditions didn’t improve. Signs of further softening in the central bank’s stance inspired investors who also continue to price in a shift to rate cuts by the Fed after the latest series of dismal economic data from the US. Draghi said that if the euro area economy slows and the central bank’s inflation target is threatened, “additional stimulus will be required”. As one of the key factors weighing on exports, he cited the threat of protectionism. Meanwhile, in the UK, Conservative Party MPs are preparing to hold the second ballot today to choose a replacement for Prime Minister Theresa May.

Against this backdrop, the UK’s FTSE 100 adds 1.21 per cent to 7447, Italy’s FTSE MIB rallies by 1.92 per cent to 21,023, France’s CAC 40 rises by 1.71 percent to 5,483, while German DAX 30 gains 1.69 per cent to 12,289. US stock index futures are also on the rise as the Federal Reserve kicked off a key two-day monetary policy meeting.

Unsurprisingly, EURUSD turned aggressively lower after the dovish comments from the ECB Governor. The pair registered nearly two-week lows around 1.1180 and then recovered slightly, towards the key 1.12 figure. The additional downside pressure on the single currency came from IFO as the institute cut Germany 2020 GDP growth forecast to 1.7% from 1.8% previously. The 2019 GDP forecast was unchanged at 0.6%. IFO also noted that weakness in industrial sector spilling over into labor market and domestic economy. In the short term, the trading activity in the pair will likely be limited as investors are preparing for the FOMC meeting. Any surprise to the upside could prompt a more aggressive selling in the euro as the current expectations ahead of the Fed meeting look a bit too downbeat.

USDJPY turned lower despite a better risk sentiment as traders adjust positions ahead of the FOMC verdict. In fact, the pair is pressures by falling yields. In particular, the 10-year US Treasury bond yields dropped more than 3% today, to its lowest level since September 2017 at 2.017%. After a brief jump to 108.70 yesterday, the greenback slipped back to 108.20 and remains under pressure. However, as long as the prices remain above the 108.00 support, the downside risks are limited.

Crude oil prices are trying to shift to a recovery mode following a dip to fresh January lows around $59.35. Recently, Brent turned marginally positive on the day and has settled around the $60 handle. The market is pressured by signs that global economic growth is being hit by the U.S.-China trade war, although losses were limited by tensions in the Middle East after last week's tanker attacks. U.S. business sentiment has deteriorated while the Chinese industrial production declined sharply, which added to the worries about global growth and oil demand. Besides, he U.S. energy department said that shale oil output is expected to reach a record in July. Against this backdrop, recovery attempts will likely further meet the selling pressure, at least in the short term.

Nathan Lambert, Head of Global FX Analytical Department

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Interest rates

Country Rate Value
USA Federal Funds 1.75 %
Switzerland 3 Month LIBOR Range -0,75 %
United Kingdom Repo Rate 0,75 %
EU Refinancing Tender 0,00 %
Japan Overnight Call Rate -0,10 %
New Zealand Official Cash Rate 1 %
Australia Cash Rate 0.75 %
Canada Overnight Rate Target 1,75 %
All rates

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