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Draghi signals, markets respond

The European Central Bank maintained interest rates at current levels at a board meeting overnight. However in following comments president Mario Draghi hinted rates are unlikely to fall and could start rising soon. Share markets responded to the positive stance on the European economy, and the Euro strengthened, but industrial commodities continued their slide. Asia pacific markets may play catch up today after falling yesterday.

Inflation is now trending higher in Europe, registering an annualised 2% in February. The twin positive implications are improving activity and a diminishing deflationary threat. Continental indices generally gained between 0.5% and 1.5%, although the DAX lagged. US investors also bought early, but then pushed the market into negative territory after import prices rose more than forecast. A late rally meant a flat US finish, breaking a three day run of losses.

Local investors may focus on the ongoing slide in energy and metals prices. Although many are interpreting this as a reversal of reflation trades, the pressure on precious metals suggests other factors are in play. A strengthening USD heading into an almost certain interest rate hike next week is a likely culprit.

Australian investors will wrestle these opposing forces today. Overnight action points to support for financial and consumer related stocks, and a belting for resources. Home lending data will speak directly to bank activity, and subdued expectations of a 1% fall in January could see a significant reaction.

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