Strong Momentum For Equities Ahead of ECB Meeting

Strong Momentum For Equities Ahead of ECB Meeting | UK Data Under Focus

It appears that nothing can stop the equity rally and the momentum is too strong. The Italian economy is surely going to face economic headwinds after the referendum outcome. It has created instability in the political arena, but investors are not much worried about this or weak GDP growth data released overnight out of Australia. The major focus is that the biggest economy in the world, the US, is going to pick up steam on the back of Trump-economic and this is what matters the most.

It is by no means any coincidence that we have 11 record closes for the Dow index since the US elections. Most of these record closes for the index have been propelled by the financial sector stocks such as GoldmanSachs and JP Morgan. At the same time, the small cap stocks have also enjoyed the rally, and this is because investors are thinking that small business will do well as the US economy will bring back jobs and the economy will rely less on foreign products.

If you look at the volatility index, it has dropped near the 11 handle which confirms that appetite for riskier assets is strong amid investors and nothing is stopping them to beef up their bullish bets. However, the volatility is so cheap, it may be no harm to protect yourself and buying volatility at these levels may not be that much of a bad idea at all.

There are two major upcoming central bank meetings; the ECB and the FOMC. Investors are focused on these and these meetings will drive the trading action in the coming days. The ECB meeting which is due tomorrow is going to remain the major talk among traders, because it is widely expected that the Fed is going to increase the interest rate and it is already priced in the market. But the actions of the ECB are of particular interest for many investors.

Perhaps this is the jolt which the president of the ECB will deliver. There are over 80% chance that the Mr Draghi will announce the extension of the asset purchase program beyond its current expiry date. The Eurozone's economy has been on a steady path of recovery and inflation is also improving by the ECB standard. It is this recovery, which may increase the chatter of tapering by the ECB during the third quarter of 2017 if not before.

The ECB along with other central banks have become vocal about the potential risks and limitations of the ultra loose monetary policy and this provides a clear evidence that they are ready to call a day on this strategy and rely more on fiscal policies.

Nonetheless, we do expect the ECB to continue their purchase pace of 80 billion euro a month until march but beyond that period, the bank is going to give themselves more flexibility in terms of freedom and how much they want to purchase. It would all depend on the financial and economic conditions of the Eurozone. This will be the key for the ECB to keep the market calm and avoid taper tantrum.

The bank will also unleash their latest projections, including their outlook for 2019. Finally, the ECB may also comment on the assets which are available to purchase under their legibility criteria. Since Trump's victory, the bond yield over in the Eurozone have risen and this has inflated the pools of assets available to purchase. During their last meeting, the number was at 236 billion and now this stands at 259 billion euro.

In terms of economic data, we have the UK manufacturing production m/m number due later this morning. The impact of Brexit is yet to come and the main focus is how much this number is holding its strength since the Brexit vote. Evidently, the sentiment is a lot more strong about the UK economy and chances of hard Brexit are fading. If the Supreme Court gives power to parliament in their decision, the chances of hard Brexit will fade further. For now, the manufacturing production number is very much dependent on the global growth story.

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