ECB PREVIEW: Yields In Focus As Markets Await Lagarde

Very good morning to you. It is Thursday the 11th of March. Hope you're doing well and had a good evening. Gonna get you up to speed on just generally the close on Wall Street, anything of importance overnight in the Asia-Pac session, and then a look ahead for today with the emphasis on, of course, the ECB policy meeting and accompanying press conference with Christine Lagarde. So first off, let's just have a review of the charts because overall I would say the news flow is relatively light in terms of major things to be aware of this morning. And, and basically wanted to strip things back a little bit and start with what is ultimately the main focal point in markets and has been of recent weeks, and that is the US yields and yields in general. And this is looking at the US 10-year yield. And obviously last week we saw quite a big acceleration moving from really the low 1.4 area all the way up to towards 1.6% in US 10-year yields. We peaked out actually on Monday, and the market started this week kind of as it left off last week, a little bit apprehensive, rotations, tech getting hit, equities bit heavy, likewise with gold with a firmer dollar. However, really since that point, over the last 2 days in particular, yields have continued to just back off a little bit, and now we reside back towards kind of 1.52%, well off the highs. We were up around 1.61 on the daily closes for, for this week. So that in itself, I think, has led to a large degree of the market rebound that we've been observing over the last 48 hours. Yesterday we saw the S&P 500 notch its best 2-day advance since early February, led by financial firms and producers of raw materials. Because don't forget, a higher yield environment is positive if it's based on the notion of growth and not that of inflation. It's kind of like a good yield movement or bad yield movement. And when it's— if you're talking about the reopening of global economies and if it's done in a positive fashion, then there's no reason why you can't have a high yield environment with it being a positive one for equities as well. That's kind of what we've been seeing. And if anything, the Dow So the Dow Jones Industrial Average, which I'll bring up here, has, has printed record high and actually closed above 32,000 for the first time ever. And this is just looking at the Dow in yesterday's session, and it really just, you know, on the breakout that we had from that double top of price activity from former highs seen at 32,114, once it broke that, it just really just kept pushing higher and higher. And these are all-time record high levels again in the futures that we've printed in the overnight Asia-Pac session. I've just marked up a couple of rectangles here of price levels that I would be keeping an eye on, uh, given the nature of the, the move up. To see either a bit of consolidation or even pullback from these levels wouldn't be, I think, too untoward. So I think appropriate to, to mark up some, some levels of retracement that could come into play if that were the case. Um, here then, 32,378, which would be some of the highs that we were seeing in the back end of the Wall Street session yesterday going into the close, and then support in the Asia-Pac session. Anything lower than that, and again, resistance and support points from, from yesterday and overnight, would be key areas at 32,254, and then deeper down on the breakthrough of that double top we had from yesterday. But yeah, interesting because in, in this type of more positive sentiment environment, we're getting the opposite then of what we had been seeing, which is Dow outperforming, Nasdaq underperforming. So on the close, actually, the S&P was up 0.6%, the Dow was up 1.5%, the Nasdaq was actually down about a third of a percent in yesterday's session. What else is triggering this? Well, we had a relatively tepid CPI number, you know, with the market being so inflation obsessed at the moment. I think natural human behavior, and that does get reflected somewhat, I think, in price in short-term reactions, is everyone's kind of leaning on the emergence of inflation happening quite rapidly. That's the general view, and I think markets have overshot that a little bit. And definitely yesterday's CPI, which was in line year on year, but the core readings were a touch softer than expected actually created a little bit of a more kind of positive reaction, that kind of relief, if you like, that inflation isn't here surging right now. But ultimately, it is something that will for sure materialize in the months ahead. So a little bit of a more of a short-term reaction effect due to market perception on timing of inflation, I'd say. Rather than a real definitive change in the expectation of emerging inflation in the future. To accompany that, Congress gave its final approval to the latest US stimulus package. Uh, this now goes to Biden for signage on Friday. So that again, another positive factor that it's just gone through without too much, um, resistance. And then we had the, the 10-year auction, the one of which the market was assigning perhaps the, a more higher priority to, just given the maturity. Um, and technically it was okay. The market kind of internals of the auction were not amazing. But I think, again, just given the apprehension that came from how, how dire the 7-year auction was 2 weeks ago, we've had a pretty decent 3-year. The 10-year was okay. That in itself, into very low kind of expectations and also against this general relative to recent performance, the market liked in reaction terms to 10-year auction. So again, it's— you have to kind of apply context, I think, to the situation. And going into the auction, you know, yields were already declining and the 10-year was already bid. So when it came out, it just kind of just topped that move up, so to speak. The combination of those three things, really, um, the slightly tepid inflation, Congress approval, the 10-year going okay all kind of further supported the general move across asset classes that we had. And this morning, equity index futures are trading as I talk. NASDAQ and S&P futures are at session highs now. Overnight then, this did spill over into the Asia-Pac session. The China CSI 300 index moved— it's had its biggest move higher in 2 months. And of course, this comes after the their state-backed intervention to support their equities just a few days ago after they'd been coming under quite a significant rout of late. And that generally reverberated across the Asia-Pac region where most indices were trading positive despite the relative mixed handover we've had from, from the US. Another thing to be aware of that has helped local sentiment there is the fact that US and Chinese officials agreed to conduct a 2-day summit next week in Alaska. Now that's meaningful because it'll be the first in-person meeting between US and China senior representatives since the Biden administration has come in. And definitely, you know, this is a strategically very important relationship for both those countries, but also for markets to really figure out then what is the, you know, what is the status quo of that relationship. Just given the, the new, the new president. The fact that they're talking is obviously a net positive. So again, it kind of plays into the whole notion of the short-term sentiment at the moment. The main thing though to talk about for today, because as I said, there's no other real news for me to, to comment on, is the ECB. And this of course is the ING crib sheet of breaking down the complexity of a monetary policy event into its most definable parts, and that being the 4 categories, if you like, between forecasts— that for inflation and growth, of which we will get new economic forecasts from the ECB, which happens essentially every alternate meeting this time round— and then you've got the actual policy statement, which is really looking at the actual policy tools in play. So the interest rate, the QE program, and the— or the asset purchase program, and then the pandemic emergency purchase program, the PEP. So they're your actual tools. And then there's the level of the exchange rate, which is the other key element of which is a focal point which markets look at. So you can almost put a division between these two things here, but kind of think of this as policy bingo, if you like. And you're trying to calculate in the end then over these 4 parts, um, where— what is their stance? How do they refer to these issues? Ticking them off. And then does this meet then an overall more dovish announcement from the ECB or more hawkish? And then that consequently will give you then the directional market impact that this could have on the euro or European yields, European equities like the DAX, for example. So here then, uh, ING's base case, uh, I'll read that out first because I do think that this is very much the case of probably what's going to happen today. And they're saying that for inflation outlook, somewhat higher inflation this year on the back of one-off factors, i.e., referring to the reopening of the economies and low base effects and energy prices. And so actually it's just a reflection of that rather than underlying consistent and persistent inflation conditions that we should be worried about. So very much as expected. Recent data confirmed base case of gradual recovery. So again, the idea that it's going to be a bit more of a slower burner, particularly in Europe with the vaccine rollout and so forth. The interest rate and the policy side of it, no change. There's the PEP size to increase if necessary. So it's kind of language reiterated to be flexible, reassuring to markets that it's there if needed. And then the exchange rate, no comment at all. So Actually, compared to prior occasions, the ECB meeting, according to analysts at ING, should not really be that much of a risk event for the euro. And the reason for that is the recent declines in trade-rated euro and euro-dollar suggest there's basically no need for ECB officials to push back against what otherwise had been a weakening— or strengthening euro, I should say. Because remember, eliminate the last 2 weeks of really price movement where the dollar has been pretty rampant following, tracking the increase in US yields we've been seeing. That then in part has forced the euro-dollar pair lower, which then counteracts any need for the ECB to say anything about what otherwise was a real point of contention over recent months about how high the euro was becoming because of the persistent weakness of the dollar. So at the moment, we're in this kind of, you know, short-term-ish phase of dollar appreciation, for now at least. And so that renders any discussion about the euro kind of null and void, which takes out a lot of the potential interest from this meeting. Of course, then, this is just the actual statements. We have a press conference, and the main topic undoubtedly is going to be rising bond yields And what does Christine Lagarde have to say about that? What are the thresholds that the ECB are looking at? What would they do to counteract it? Obviously, she's not going to answer these explicitly, but how she responds to that, that key subject, is going to be important for how to then trade these assets throughout the afternoon. While the ECB may talk about unwarranted increase in yields and the tightening of financial conditions, more forceful action would weigh on the single currency, of course, i.e., an increase in perhaps the PEP. That's one of the options here which definitely would constitute a more dovish reaction in terms of what this might mean, which could be equities higher, euro lower, yields lower. But that's highly unlikely. I don't really see any need at this point for them to really move the needle as such. There has been source comments out in regard to the forecasts overnight, and they've said ECB draft forecasts assume only a fleet receiving jump in inflation, and savings will not fuel a spending boom. And so again, the downward revision to growth forecasts for 2021 and upward revision to inflation forecasts for '21-'22 from the previous issue of these numbers a few months ago, I don't think would come as any surprise at all. So really very much looking more not to the policy statement at 12:45, but to the press conference, and how does Christine Lagarde tackle the fairly thorny issue of the yield move we've had of late. She has, you know, comparative, I guess, for a lot of people to the likes of Draghi. Not saying that she struggled, but perhaps she's not quite as eloquent with her responses, and that's room for an intraday prop speculator for potential opportunities. So we'll be watching that at 1:30 very very closely. Looking at the calendar for today, the UK-European morning is basically empty, so nothing really to look forward to. So I'd be just marking up your charts for some key technical levels and then, you know, awaiting the ECB event to happen. Two-part, of course. The statement policy announcement coming out 12:45, the press conference 1:30. The latter will be alongside US jobless claims, I suspected at 725,000 today. I don't think that really rocks the boat, so to speak. It's pretty much consistent of what we've been seeing of late. So I wouldn't be looking for that to cause many real triggers in that respect. Then it's pretty quiet overall on the calendar. We do have in auction space some Italian paper coming to market, but then $24 billion in the 30-year bond auction wraps up the 3 auctions from the US, the $120 billion we've had for the week. I would say just given the way of which the 3 and the 10-year have gone, I don't see any real issues that this 30-year will encounter. So I don't really see that as too much of any type of risk event, generally speaking. And that is it. So gonna let you guys get on with the session. Any questions at all for me, just reach me in the Discord room in the Amplify Live community, or if you're watching this on YouTube, just feel free to leave a comment. Absolutely happy to help. All right, have a good day, guys.