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Stocks consolidate as euro rises

Asian stocks shook off Monday’s losses, as European stock markets rallied on the back of a broad-based short squeeze posterior to the Italian referendum.


While the DAX (+1.63%) and the CAC (+1.00%) closed significantly higher, the FTSE MIB limited losses to 0.21% at Monday's close. Italian Prime Minister Matteo Renzi has been asked to postpone his resignation until the 2017 budget has passed. Nonetheless, it is just a matter of days before we see Renzi stepping down. The President will then have 70-days to form a new government. Rising echoes of an early election call from Italy’s right wing parties hint at rising woes in Italian politics.


Italian banks are expected to remain vulnerable to political jitters and to underperform their European peers. We overweight European banks with diversified risk exposure. US and Asia exposure are most preferred, while high UK exposure is not recommended due to Brexit uncertainties.


The FTSE opened downbeat, as all sectors except utilities, pared gains accumulated at the post-Italian referendum short squeeze.


HSBC (+2.35%) is the biggest gainer, as energy stocks lead losses.


BP (-1.17%), Royal Dutch Shell (-0.80%)


Will the ECB move toward a Qualitative QE?


The euro rallied to 1.0796 against the US dollar on the back of a decent short squeeze. Gains are expected to remain limited heading into Thursday’s European Central Bank (ECB) meeting. The ECB is suspected to actively intervening on the Eurozone yield curves already, given that the spread between the Italian and German yields remained contained after Italy’s idiosyncratic risk rose significantly after Sunday's 'no' vote. We reiterate our expectation of a qualitative shift in the ECB’s policy statement. This would include an expansion of the Quantitative Easing (QE) programme beyond March 2017, with light, if no, emphasis on the quantity of purchases, versus a stronger commitment to yield control.


Seizing the euro’s downside potential against the greenback


The post-Trump sell-off in the euro versus the US dollar may have bolstered the euro bears for the moment. Therefore, the ECB decision could trigger a short squeeze, no matter what Mario Draghi pulls out of his hat. In the mid-run however, the EURUSD has the potential to depreciate below the March’15 dip of 1.0460, as unlike in March, the actual US yield curve lends the US dollar a more concrete base to build on gains against the single currency.