Financial market research and analysis

The European Central Bank (ECB) President Mario Draghi’s speech was a godsend for the European bond and stock markets on Tuesday. The Eurostoxx 50 and the Dax closed the session 2% stronger, the CAC rose 2.20%, as the euro got shattered across the board.

The EURUSD slipped below the 1.12 mark as the ECB President Mario Draghi said that further stimulus measures could be needed if the inflation and growth outlook doesn’t improve. The euro-area inflation fell to 0.1% m-o-m in May, from 0.7% printed a month earlier. The core inflation remained steady at 0.8% on yearly basis. ‘The negative demand shocks weigh by more than 1 percentage point on euro area inflation since the beginning of the crisis’ according to Draghi and the demand-side risks have certainly increased in the current macroeconomic environment due to escalating trade war between the US and China and its negative influence on global markets.

Despite the negative interest rates, Draghi insisted that the interest rate cuts are still part of the ECB’s toolbox for further policy easing, meanwhile the Quantitative Easing has still considerable headroom. The ECB is willing to prove to the world its ability to fight back the inflation.

And, if it takes deeper negative rates and further asset purchases to get European consumers spending, then be it.

Presently, the Euro-area money markets expect a 10-basis-point cut by December this year.


BoJ is cornered by dovish central bank comments

Mario Draghi’s commitment to do ‘whatever it takes’ to lift the inflation expectations in the euro-area has certainly inspired Japanese investors, who expect the Bank of Japan (BoJ) to deliver a similar verdict at tomorrow’s policy meeting.

The Nikkei (+1.65%) and Topix (+1.56%) were better bid in Tokyo, while the yen remained little changed against the greenback.


UK inflation may have eased in May

UK stocks jumped on the back of a bull as well. The FTSE 100 gained up to 90 points and closed Tuesday’s session at 7443p. All sectors traded in the green.

Meanwhile, the second round of ballots confirmed that Boris Johnson is by far the favorite candidate to replace Theresa May as the Conservatives’ new leader and the UK’s next Prime Minister. Although Johnson’s leadership could jeopardize the past three years’ efforts to seal a suitable Brexit deal for both the UK and the European Union, the markets have already priced in the increased political uncertainties.

Now, the attention shifts to the inflation figures due today, and the Bank of England’s (BoE) monetary policy decision due on Thursday. While the rising inflation in the UK opened a window of opportunity for a more hawkish policy stance, the actual dovish trend among the major central banks will likely force the BoE hawks to take a step back.

In addition to this, today’s inflation data should confirm a softening in May. The British consumer price index is expected to have eased from 2.1% y-o-y to 2.0% in May, as the core inflation is seen at 1.6% y-o-y versus 1.8% printed a month earlier. A soft inflation read can only revive the BoE doves and increase the selling pressure on the pound.

The pound tested the 1.25-support against the US dollar on Tuesday.

The FTSE futures (-0.06%) hint at a flat open in London. We could see a minor price rectification following Tuesday’s rally, yet the correction will likely remain limited. Energy and mining stocks could outperform after the jump in oil and commodity prices.


US equities rally ahead of the FOMC decision

The S&P500 (+0.97%), the Dow Jones (+1.35%) and NASDAQ Composite (+1.39%) edged higher into the Federal Reserve (Fed) policy decision due later today.

Given the circumstances, the FOMC members have little reason to fear moving too dovish. Suddenly, the expectation of two-to-three rate cuts within the next twelve months seems very reasonable. And to be honest, the equity and bond traders know that the Fed has got their back. They also know that the bank has enough margin to give the market what it demands. Looking back, the Fed has increased its rates by 525 basis points since 2015. A 50 to 75-basis point adjustment on the downside will only be a reassurance measure.

The Fed will probably not move at this month’s meeting. But investors expect the Fed to lose ‘patience’ in its accompanying statement and remain ready to ‘act as appropriate’.

And the US dollar may not lose too much of its strength either. With the low -to-negative interest rates elsewhere, the USD will still provide a better remuneration to its holders. The US dollar index rebounded by 1.20% since its June dip, although the US 10-year yield declined to 2.06%. Hence, the US dollar could remain strong across the board, though the speed of appreciation may slow.


Cryptocurrencies rally as Facebook officially introduces Libra

Bitcoin traded past $9300 and Facebook shares jumped to $194 after the company officially introduced Libra to investors. The tech giant is preparing to launch its own coin, Libra, by the beginning of 2020. Provided that Libra is a stablecoin, it will not compete with the most popular cryptocurrencies such as Bitcoin or Ethereum. Libra’s purpose is to simplify and to cheapen the financial transactions across the world. The idea is to allow users to send money across the globe as easy as they send messages and photos. There is certainly a good potential for business expansion especially in emerging economies, where a decent percentage of the population do not have access to a bank account.

Though Libra doesn’t necessarily give more legitimacy to cryptocurrencies, it could mark the beginning of a new era in the crypto industry. Now, it is important to see how policymakers will react to news that the world’s biggest community could exchange cash on a parallel channel to the financial system.