FTSE -24 points at 7264
DAX -28 points at 12444
CAC -12 points at 5275
Euro Stoxx -14 points at 3564
The European Central Bank (ECB) meeting is the major highlight of this Thursday. The ECB is broadly expected to maintain the status quo, yet the focus will be on the accompanying statement. President Mario Draghi could ‘tweak’ the language of his communiqué in line with the expectations that the ECB could start reviewing the Quantitative Easing (QE) exit options as soon as the June meeting. This is six months earlier than anticipated until this week. Many think that the EUR-favourable outcome from the first round of the French election could give a reasonable justification to start the tapering talks.
We warn that the markets could have gone well beyond themselves, along with the over-excitement vis-à-vis an eventual, though high probability Macron win. Therefore, we could expect the ECB to be down to earth and wait until the official results of the election, then move into action. A less hawkish than expected ECB rhetoric could temporarily dent the appetite in the EUR crosses.
The EUR/USD advanced to 1.0951 on Wednesday. The 1.10 level is the main challenge before the EUR-bulls and could be breached if Draghi hits the nail on the head at his press conference. Support to the actual positive trend stands at 1.0860 (minor 23.6% retracement on April rise) and 1.0805 (major 38.2% retrace).
The European stocks are expected to be handed in a slightly short, mostly flat market. Yet, encouraging earnings announcements could cheer up the investors. Financials and energy stocks could benefit from optimism following Deutsche Bank (DE:DBKGn), Lloyds (LON:LLOY) and Total results.
Deutsche Bank announced that its Q1 profits more than doubled on the back of improved market activity. The DB shares could extend the positive momentum toward the year high level, €20.
Total printed 56% increase in Q1 profits on recovery in oil prices and its cost cutting program.
Lloyds' Q1 adjusted tax profit rose to 2.08 billion pound versus 1.96 billion expected by analysts. Statutory pretax profit rose 99% to 1.304 billion pound. The bank also upgraded its guidance for the 2017 net interest margin (NIM) and capital generation.
In Japan, as widely expected, the Bank of Japan (BoJ) kept its monetary policy unchanged at today’s meeting in Tokyo. The BoJ sounded more optimistic about growth, less confident about the inflation. The positive trend in the USD/JPY is supported by the dovish BoJ and the US’ expansive fiscal dreams, which in turn are translated into more hawkish Fed expectations.
The key USD/JPY resistance is eyed at 112.13 (major 38.2% retracement on December – April decline), if surpassed, should suggest a mid-term bullish reversal and bring the 115.00 level back on radar. The 100-day moving average, 112.88, could be an intermediary target for short-term long positions.
Moving to the U.S., President Donald Trump’s tax proposals lacked details as suspected. The plan he promised was a one-page list of bullet points which included cutting the corporate rate, targeting overseas profits and eliminating the estate and alternative minimum levies’ cited Bloomberg news, yet the announcement gave little-to-no detail on the above-stated actions’ impact on the government budget and how to finance these significant cuts.
The Dow Jones remained capped at $12,070 and closed the Wednesday’s session 21 points softer at $20,975. Likewise, the S&P 500 gave back 1.16 points.
Trump’s tax reform objectives are indeed positive for the U.S. corporates and businesses, and would support a further rise in the stock valuations. Yet, the lack of details on the financing leg compromises the ability to bring these reforms to life. Therefore, investors are undecided. Is it the right time to jump on the back of the bull, or would it be better to wait for an eventual correction and enter the bull market at a lower level, ideally when there is more visibility over the entire tax plan.
Either way, the Trump news gave a boost to the Federal Reserve (Fed) hawks. The probability of a June rate hike rose to 69.7%. The U.S. dollar gained marginally, yet the appetite remained limited.
The AUD/USD rebounded after hitting the 0.7454 support (50% retracement on December – March rise). Offers are touted pre-0.7500/ 0.7545 (option barriers / 200-day moving average) as the Fed hawks remain in charge of the USD markets. We revise our view from negative to neutral within the 0.7450/0.7545 range. Large put options stand at 0.7450 at today’s expiry, and could reinforce an eventual negative breakout. The next critical support is eyed at 0.7384 (major 61.8% retrace).
Gold is supported by a number of dip-buyers at $1260/1256 (major 38.2% support to the positive trend in March), given that Trump’s tax reforms aren’t solid enough to convince investors to cut their gold allocations and rush into the stocks. Though, the topside appetite remains limited due to the rising Fed rate hike probability.
Quick glance at technicals on LCG Trader:
AUD/USD intraday: Short positions below 0.7505 (pivot) with targets at 0.7450 & 0.7430 in extension. Above 0.7505, upside potential to 0.7525 & 0.7545.
EUR/JPY intraday: Short positions below 121.55 with targets at 120.90 & 120.40 in extension. Above 121.55, upside potential to 121.95 & 122.25.
EUR/GBP intraday: under pressure. Short positions below 0.8495 (pivot) with targets at 0.8455 & 0.8435 in extension. Above 0.8495, upside potential to 0.8510 & 0.8530.