Asia and the EU
North America Open
After strong rallies this week, markets took a pause today, with price action in equities and FX decidedly more muted, as US futures were slightly lower by 20 basis points and risk FX was moribund as well.
Traders were looking to the ECB presser due at 12:30 GMT as the marquee event of the day, with most market participants expecting an additional 250
B to 500
B euros in funds for the PEPP. The lower-bound case will likely disappoint traders in both FX and equities alike, as asset markets are expecting aggressive measures from central banks to maintain liquidity and spur on demand.
There has been much hand-wringing over the conflict between the German Constitutional Court and the EU over the legality of the QE program. But the EU has essentially batted away the ruling by stating that Germans have no authority over EU law and only the EU Court can determine the legality of any pan-European action. Therefore, it’s unlikely that Ms. Lagarde will be deferential in any way to the German position and will most likely opt for the 500
B-euro expansion, which should pacify the credit and equity markets.
The EUR/USD has been on a tear lately, putting its best multi-day rally in years and, if the ECB remains accommodative, the currency should remain bid. As many analysts have pointed out, in a post-COVID world, all the normal economic variables are flipped around and a highly accommodative policy is actually viewed as positive for the currency, because it provides support for a rebound in growth.
Away from the ECB, the calendar is quiet today and the key question is whether the markets will be able to extend the risk-rally much further. The price action suggests that buying momentum may be exhausting itself after breaking key levels in the S&P 500 and NASDAQ yesterday, so some correction may be due as the day proceeds and markets prepare themselves for the NFP release tomorrow.
