The ASX 200 index has this morning followed the pattern of recent weeks by significantly underperforming US markets.

The local index is now down 4.5% since the beginning of August compared to a 0.5% rally in the S&P 500. This is partly explained by the ex-dividend season in the high yielding Australian market. However, “yield” sectors like utilities and banks have lost more than their dividend in recent weeks and helped drag the ASX 200 lower.

The question for traders may now be whether the Australia 200 is going to test the potential support of the trend channel and 200 day moving average just above 5200 

Last night’s comments by Mario Draghi add to cumulative evidence that central banks are inching closer to the end of the global monetary easing cycle.

The European Central Bank, along with the Bank of Japan has been aggressive in signalling a “whatever it takes” approach to central bank stimulus. However, the fact that the ECB is yet to discuss an extension of its bond program adds to the impression of growing stimulus fatigue by global central banks. It follows the token nature of the BOJ’s latest addition to stimulus and Glen Stevens recent musings about the effectiveness of unconventional monetary policy.

Despite last night’s comments it is likely that the ECB will extend the deadline for its current QE program beyond March 2017 and also adjust its rules about the kind of assets it can purchase Failure to do these things would amount to a withdrawal of monetary stimulus and the Eurozone economy is not at a stage where this is likely to be prudent by March next year.

However, if the ECB does not add to the quantity of its program it will be a little easier for the Fed to lift rates and lead global central banks slowly out of the current easing cycle. 

For the medium term all this still adds up to a degree of divergence between between the US Fed and other major central banks. The Fed is likely to be increasing rates and gradually withdrawing stimulus while the ECB and BOJ will leave their programs in place and maintain an easing bias.


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