In a week that is offering very little original news flow, the ECB is really driving trade across the asset classes through the launch of its quantitative easing program, or the Public Sector Purchase Program (PSPP) as it has been named.
The program started on Monday and is undoubtedly having a big impact on the financial system, flooding it with liquidity and driving eurozone bond yields to record lows, while capital is already flowing elsewhere as investors look for better yields. Even US Treasuries are benefiting from the excess liquidity in the system even though the Fed is expected to raise interest rates over the summer. When the yield on offer is at such a premium to Germany, it’s not overly surprising.
It seems that when looking for the safety of bonds, investors have the choice of extremely low yielding safe eurozone debt, some of which is offering negative yields, or US Treasuries where there is a high likelihood of capital losses once interest rates rise. The benefit of the latter is that you stand to benefit from the currency appreciation of the dollar which so many people see as inevitable.
Some of the most bearish traders were talking about parity in EURUSD by the end of the year, now some are suggesting it could happen at the end of the month. I doubt we’ll see that as it’s already a very crowded trade, it’s difficult to find anyone who is bullish. I think 1.05 could prove to be an interesting support level and we’re not that far off it now. The one thing that could take it below there is the number of capital outflows from the eurozone, which appears to be growing as the ECB buys up sovereign bonds.
The impact these moves have has on other assets is extraordinary. The dollar has benefited greatly from the moves which has weighed heavily on commodity prices, leading to heavy losses in exposed stocks and indices on Tuesday. The stabilization in commodity markets is helping stocks today, with Europe trading much higher and the US seen opening in the green as well.
With no significant data releases or events to come today, especially if talks between Greece and its creditors continue to stall as expected, I expect these ECB-related moves to continue to be a major driver in the markets. Further dollar strength could prompt further losses in commodities which could get a reversal in stock indices which are faring well so far.
The S&P is expected to open 4 points higher, the Dow 46 points higher and the Nasdaq 10 points higher.
For a look at all of today’s economic events, check out our economic calendar.
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