Originally published by Rivkin Securities
A quiet night for markets with little in terms of economic data to guide traders with both the US and UK closed for public holidays. Much on the focus turned to central bank speakers, in Europe ECB President Mario Draghi appeared before the European parliament for a quarterly questioning where he continued to highlight the need for monetary stimulus. Draghi noted that “an extraordinary amount of monetary policy support, including forward guidance, is still necessary” despite the broadening recovery in the Euro-zone.
GDP has remained fairly stable over the past two-years, currently sitting at +1.7% annualised, unemployment has steadily decreased from 12.10% in March 2013 to sit at 9.5% and PMI reports continue to signal the recovery is broadening throughout the region. However there is not yet any sustained upwards momentum in prices, while euro-zone CPI rose to +1.9% year-on-year in April from +1.5% and core inflation rose to +1.2% from +0.7%, inflation data due to be released on Wednesday is expected to show prices weakening. Headline inflation is forecast to drop to +1.5% while core inflation is expected to dip to +1.0%, both below the ECB’s target of near but just below 2%.
The market has been intensely focused on the changing of any forward guidance to signal a winding down of the stimulus program with expectations the statement from the next ECB meeting on June 8th will drop comments about risks to the downside. While the ECB may remove some language around risks to the downside, the message is likely to be careful to not sound in any way hawkish and stress the continued need for continuing stimulus. This is supported by ECB officials over the past few months who continue to stress the case for not changing their forward guidance and reinforcing that the ECB QE program remains key to the economic recovery.
The euro edged -0.16% lower and is down a further -0.23% this morning while European equity markets were mixed on Monday with the DAX edging +0.21% higher while the Euro STOXX 600 finished relatively flat, down just -0.03%. Political risks remain in focus with some speculation Italy may hold its next general election in Autumn 2017 in line with Germany and ahead of the next due date of May 2018. Current polling has the Democratic Party neck and neck with the Five Star Movement, a Euro sceptic party that was in the headlines for much of 2016, with around 30.5% respectively. The concern for investors here is that a victory by the five star movement could see Italy exit the Euro-zone, however at this stage this is an unlikely outcome.
The five star movement have polled strongly throughout 2017 starting the year off around +27.5%, something markets are very well aware of. However Italian governments are typically formed by coalitions, with no one party winning a majority. The five star movement have continued to state publicly that they refuse to align with other parties, and a coalition between other parties remains the likely outcome. On top of this the Italian constitution in its current form does not allow for a referendum to be held on exiting the Euro-zone nor are there any indications from the Italian public that they wish to follow the UK in exiting.
Still investors recognise the risk around politics and the Italian FTSE MIB index closed -2.01% lower overnight while bond yields spiked with both the two and ten-year Italian yields rising 2.3 and +8 basis points respectively. Meanwhile safe haven German government yields declined with the two and ten-year yields falling -3 and -3.7 basis point respectively, widening the spread for Italian ten-year yields over German counterparts to +1.878%.
Locally we can expect a slightly softer start to trade with ASX SPI200 futures down -4 points in overnight trading.
Data releases:
· Japanese Unemployment (MoM Apr) 9:30am AEDT
· Japanese Retail trade (MoM & YoY Apr) 9:30am AEDT
· Australian Building Approvals (MoM & YoY Apr) 11:30am AEDT
· French GDP (QoQ & YoY Q1) 4:45pm AEDT
· Euro-zone Economic and Business Confidence (MoM May) 7:00pm AEDT
· German Inflation (MoM & YoY May) 10:00pm AEDT
· US PCE Inflation (MoM & YoY Apr) 10:30pm AEDT
· US Consumer Confidence (MoM May) 12:00am AEDT