The European Central Bank’s Mario Draghi once again threaded the market needle with a policy statement that heralded the end of stimulatory bond purchases while deferring any interest rate rise until the second half of 2019. The Euro plunged more than two big figures from above 1.1800 to below 1.1600. European stocks surged, but the relatively stronger US dollar weighed on commodities and brought a more muted reaction from US investors.
The ECB joins the US Federal Reserve in leading the globe out of the historic post-GFC central bank support program. While investors may fear higher interest rates, the stronger underlying economies that drive the stimulus withdrawal are positive for company profits. These competing drivers mean that investor sentiment swings are an important consideration for markets, although a continuation of the overall drift towards growth exposed assets is likely.
The positive response to the ECB statement are spilling into Asia Pacific markets. Futures markets are pointing to stronger opening moves across the region. Lower local currencies are also supportive. The exception is Hong Kong, as it appears yesterday’s weaker than forecast China retail sales and industrial production numbers will drag.
Attention now turns to the Bank of Japan’s meeting this afternoon. Persistently low inflation means that expectations are the 0.1% cash rate and ten year bond zero interest rate policy will remain. Australian shares are expected to gain, especially in light of a counter-intuitive lift in iron ore prices.