Guess who’s back
European Central Bank President Mario Draghi has acted as market saviour a fair few times since his appointment to the top job in European monetary policy. His ‘whatever it takes’ speech in 2012 has gone down in market folklore as an important, necessary and altogether brave decision to combat the teeth of the European debt crisis. Markets were again looking for Draghi to heal their wounds yesterday and although no new policy or stimulus was forthcoming, Mario Draghi dangled the promise of such in front of our faces.
In his press conference yesterday Draghi justified his tongue in cheek nickname as the ‘World’s Least Subtle Central Banker’ by continually emphasising that the European Central Bank will ‘possibly reconsider its policy stance in March’ and that were ‘no limits’ to what the bank would do. Every question that journalists gave him, those phrases were woven into the answer. A pink neon sign and a chorus of dancing girls would have been less blatant.
Inflation expectations driving action
We said at the beginning of the year that we did not foresee any more action from the European Central Bank unless we see a significant decline in oil prices and subsequent inflation expectations. Draghi made his point clear yesterday by noting that the price of a barrel of oil has fallen by 40% since the last official inflation estimates were created. The new ones due at the ECB’s March meeting – you see how it is all coming together – will forecast price rises out until 2018 and there is a decent chance that HICP is seen below the 2% target.
For now we have 6 weeks of expectation management. If you’re beginning to think that this all sounds rather familiar then the similarities between this ECB meeting and October’s are huge. Draghi hints at additional stimulus at the upcoming meeting and ECB members sow the seeds in markets through the coming weeks. December comes and Santa disappointed us. He would do well to not make the same mistake again.
Markets breathing a sigh of relief
In the short term, the euro is weaker. Nothing fundamental has changed of course but they don’t need to for cracks to appear in the very fragile market sentiment that investors are trading with at the moment. I’d like to think that in the absence of another leg lower in global risk and/or oil we can see GBP/EUR rebuild from here. We are back above 1.31 this morning, having started yesterday in the 1.29s. GBP/USD has also rebounded slightly but yield differentials continue to point to a stronger USD.
The Day Ahead
Due to my inability to read a calendar I told you that the latest retail sales numbers from the UK were due yesterday. They are actually due today. Luckily enough nothing has changed our view that the retail sales announcement for December is a difficult one to call. Anecdotal evidence seems to show that December was a strong time for the High St but the advent of ‘Black Friday’ means that November’s 1.7% gain may have eaten some of December’s lunch. ‘Cyber Monday’ the shopping day for people who cannot bear an out of town shopping centre falls in December this year and should allow for decent strength.
The latest reading of the UK’s public finances are also due at 09.30.
Markets are rebuilding from their recent losses so far today with oil above $30 a barrel and Asian shares bouncing higher. We are looking for a rather chilled session with the possibility of a short squeeze into the close.