ECB’s Draghi’s tone keeps market mood upbeat

This week has been a busy week in terms of macro economic data. Monday was a muted day with the US closed on holiday, but Tuesday made up for the previous day’s lack of data. Inflationary data surprised to the upside in the UK (although there was nothing to ride home about), whilst there were mixed data in the US and Eurozone for the remainder of the week. The ZEW economic sentiment for the Eurozone declined whilst that of Germany increased, indicative of the robustness in the Germany economy and frailties and difficulties being witnessed in the rest of Europe. Housing data in the US disappointed and inflationary data falling short of what the market was previously anticipating.

However, the key event of this week was yesterday’s eagerly anticipated ECB meeting, the first since Draghi disappointed on 03 December. Much has happened since then. Equities tumbled, spreads widened, gold plummeted even further and economic data disappointed and currencies were pretty much all over the place.

In his customary press conference, ECB head Mario Draghi acknowledged that market conditions deteriorated since the December meeting, making particular reference to the fact that the threats to the single currency region’s recovery have escalated, as fears that a persistent slowdown in China are expected to bring global economic growth to a halt. Furthermore, he stated that interest rates are expected to remain at present or lower levels for an extended period of time.

Draghi opined that “downside risks have increased again amid heightened uncertainties about emerging-market growth prospects. The credibility of the ECB would be harmed if we weren’t ready to revise the monetary-policy stance.”

This sent the euro lower and spurred a reversal of risk aversion by investors as risk assets were back in demand following Draghi’s opening comments. Equities were back in demand, oil recovered from multi-year lows, HY rallied and financials were back in the fray.

Yesterday’s session was pretty much a breather which investors welcomed, halting the haemorrhage and carnage we have witnessed in the first 3 weeks of 2016. Markets today have to contend with yet another flurry of key economic numbers, namely some key PMIs primarily in Europe and also in the US as well as some US housing stats. Following yesterday’s strong market showing, markets are opening positively this morning. Now that's a breath of fresh air as we have not had two successive positive days in quite some time.