ECB in focus
Global equities continued to rally ahead of this afternoon ECB meeting during which Mario Draghi should deliver a massive easing package – at least this is what market participants are expecting. As in the prior 6 days, equities went up with futures on the S&P 500 climbing as much as 0.60% to 3,020 points during the Asian morning before retreating towards 3,005. Across the Atlantic, European futures were also better bid with futures on the EuroSTOXX 50 climbing 0.35% to 3,526 points. Similarly, the German DAX futures inched up to 12,393, up 0.35% on the session. Overall, the risk sentiment remains upbeat as trade optimism prevails after both China and the US made a gesture to ease tensions by delaying partially, or completely, tariffs.
However, the main event of the main remains the ECB meeting. So far, the market is pricing a 61% chance of 10bps cut to the deposit rate and a 39% chance of a 20bps cut. On the quantitative easing side, it is less clear but monthly purchases of 25bn to 30bn seems the most reasonable option. However, it is worth pointing the board of governors appeared split over the necessity of another round of net asset purchase. As mentioned by certain analyst, the ECB could use trick that would to deliver a massive package while at the same time discounting the total effect of the measure. Indeed, at the moment the ECB is applying negative interest rate to most of the banks’ reserves, unlike the SNB and BoJ. For example, in Switzerland, the SNB applies negative interest to deposit in excess of 20 times the minimum reserve requirement, which means roughly one third of the total deposits are subject to negative rates. This solution has the advantage to make everybody happy: the market has the “new free money” announcement, while the ECB’s hawks are able to trim the real effect of the fresh easing measures QE. Against such a backdrop, it is difficult to say how markets will react, as expectations are sky high.
US – China goodwill gesture boosts risky assets
Investors seem to have enough arguments to support risk appetite. The long-awaited ECB meeting along with fresh headlines from both the US and China are boosting equities which are set for another weekly gain. The recent decision made by US President Donald Trump to delay tariffs of 30% on $250 billion worth of Chinese products from 1 October to 15 October 2019 due to People’s Republic of China 70th anniversary as well as China’s tariff waivers come as comforting announcements on the marketplace. Yet hopes of a breakthrough in existing trade conflict is subdued, as negotiations planned for early October are likely to distance from fundamental discords surrounding intellectual property, technology transfer and a thorough enforcement mechanism.
The two largest economies are set for a new round of talks officially taking place in mid-September with deputy trade negotiators while minister-level talks involving Chinese Vice Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin should occur in early October. Topics including US agricultural product imports, sales ban on China’s tech firms and tariffs delay are likely to be discussed, although no major progressions should be considered. Furthermore, the recent decision made by Chinese counterparts to exempt a batch of 16 products out of 8000 imposed items, including animal food, cancer drugs and chemicals remains limited considering that the focus of trade negotiations mainly concern soybeans and related agricultural goods. We would therefore remain cautious ahead of upcoming discussions starting next month.
USD/CNY declined -1.15% from previous 7.1789 (03/09/2019 high), trading at 7.0893 (-0.38% week-to-date) as the People’s Bank of China fixing is set at 7.08.
