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Markets tread water ahead of Draghi

Positive sentiment continues to filter into risk assets as commodity markets confound traders desperate for a fitting narrative to match the price action. WTI traded to a five-month high as US crude production dropped to the lowest since Oct 2014 according to the International Energy Agency latest report.

A four month high on the S&P500 was recorded in New York yesterday and Asian stocks have this morning maintained this momentum. The Nikkei is up 2.62% and the USDJPY seems over the worst of the recent downswing as it presses higher at 109.65.

I recall the last time many were expecting a boring ECB meeting and were met with a glitter throwing protestor standing on Draghi’s desk so we can’t really rule out some excitement today. It’s probably best not to get one’s hopes up however as the ECB is expected to maintain rates as is and keep the QE programme unchanged for the time being. We may get some additional insight into how the corporate bond buying programme is working.

But beyond technical details, this meeting has a particular importance in terms of the general sentiment vis-à-vis the ECB’s strategy and how Mr. Draghi feels about the recent German criticism regarding the efficiency, or the lack of, monetary measures in place.

German Finance Minister Schaeuble has explicitly voiced (oh so many times!) his frustration regarding the negative rate policy (NIRP), giving a sharp warning that the negative rates could cause more damage than good. The NIRP would also hurt the German banking system proportionally more, in an economically challenging environment. It is worth noting that the migration crisis and the Brexit talks are really only serving to increase tensions on the political end of the scale.

From a monetary perspective, there is little doubt that the European Central Bank should keep its rhetoric as dovish as the market needs it to be. Despite the extra-loose policy, there is little improvement in Eurozone’s inflation expectations. The 5y/5y inflation swaps slipped below 1.40%; the Eurozone sovereign yields are lower across the board. In this respect, two-thirds of the market is looking for more monetary stimulus in September.

The Dax has managed to gain 10% over the past 9 days marking the biggest 9 day gain since December 2011. So we cannot say the programme isn’t positive for equities even if it take a while to work.

The EURUSD retraced from 1.1388 in New York yesterday and slipped below the 1.13 mark in Asia. The euro-bears are gaining field on dovish ECB speculation before this meeting.  But given how badly the recent monetary loosening measures failed to drag the euro lower, the euro risks remain two-sided.

UK Retail sales is expected at 9.30am (forecast -0.1%) on foot of weak Easter trade while US unemployment claims (expected 265k) will be released later this afternoon.