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‘Urgency’ from euro bears has gone

Weak retailers and miners hurt the FTSE

The European Central Bank offering no hints that it will slow the purchase of European assets helped European stock indices to modest gains. The FTSE 100 slipped on Thursday with investors preferring the more overtly stimulated European indices.


Another sharp daily slide in the price of oil and metals prices sent mining company shares to the bottom of the UK equity benchmark. Retailers too were out of favour, despite some robust results from Morrison’s. Full year results from John Lewis had a negative bearing on the entire retail sector.


The indication from John Lewis that selling prices are lagging input costs highlights the negative consequence of a weaker sterling on retailer profit margins. Supermarkets especially are still in a bitter price war. None of the supermarkets want to be the first to lift prices for fear of losing more sales to the discounters. While that remains the case, margins will inevitably be hurt.


S&P 500 celebrates anniversary of crisis low

US stocks were flat in early trading, supported by the idea of no early end to central bank stimulus in Europe. The S&P 500 was celebrating the 8-year anniversary of its financial crisis low. From 666 on March 9th, 2009 to above 2300 today, the index has grown its value 3 ½ times.


The eight-year long rally in US equities remains one of the most hated on record, and that is certainly no less the case with Donald Trump as president. US mutual funds have seen pretty consistent outflows of funds since 2009, yet the markets kept on plugging higher. It’s notable that this trend has shown signs of reversal recently.


US equity funds have seen nearly $80bn of inflows since the US election, reversing some of what was at some point a cumulative outflow since 2015 of $230bn. If the much-lamented “cash on the sidelines” since the financial crisis finally participates, this stock market rally may still have legs yet.


‘Urgency’ from euro bears has gone

EURUSD swiftly reversed from its lowest this week to above 1.06 during Thursday’s ECB press conference. The euro initially dropped after the ECB surprisingly opted to keep its formal statement mostly the same, despite lifting inflation and growth forecasts. ECB President Mario threw out two comments during his press conference that caught markets offside, sending the euro soaring in the other direction. Draghi highlighted that the ECB had removed the part of its statement that referenced ‘to use all instruments’ necessary, saying there was no “urgency” to take further action.

With the ECB buying 60bn euros a month and the Fed set to lift rates next week; the policy divergence right now is stark. The question that needs answering to determine the future direction of the euro is: Will the divergence grow or shrink? The jump in the euro today says markets see no easing of policy from the ECB today as meaning tapering quantitative easing tomorrow. From a purely Eurozone economic data perspective, the euro is undervalued. But the factors at play are not entirely economic.

Whether Draghi is forced to succumb to any pressure to end the ECB’s ultra-accommodative policy stance will depend on the outcome of this year’s European elections. A win for populist candidates like Wilders in the Netherlands and Le Pen in France would likely see the ECB act to stabilise the potential upset in markets with loser policy. The French election in particular could put the ECB on the defensive. Marine Le Pen has put a referendum on Eurozone membership at the heart of her Presidential campaign, making her a direct threat to the breakup of the Eurozone.


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