Stocks Resume Slide, Will ECB Stay Dovish?

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Stocks turn negative in EU
ECB on tap
Nikkei -0.88 Dax 0.08%
UST 10Y 0.69
Oil $37
Gold $1946/oz
BTCUSD $10263

Asia and the EU
No data

North America Open
EUR ECB 8:30
USD Weekly Jobless 8:30

Markets were choppy in Asian and early European trade with equities first selling off then rallying to come back to even as traders squared up ahead of the ECB meeting later today and the latest unemployment claims data from the US.

Equities seesawed most of the night but found some buying into the London morning with Nasdaq recapturing the 11,400 level. Nasdaq has been the key index over the past week as it corrected violently dropping 10% off its all-time highs in just 3 days which was the fastest correction on record. For now, the high- tech index has held the 11,000 level and could mount a rally back to 12,000 if the labor data out of the US shows further recoupment of jobs.

The bullish bet in the market hinges on the thesis that the risk of COVID has now passed and that the service part of the US economy which comprises the vast majority of US output will return to full capacity soon. That view may much too optimistic as most of the recovery gains have already happened and the incremental improvements from the initial return to activity have been far more muted. Still, as long as data continues to surprise to the upside the bulls maintain control of the equity markets.

In FX the focus will be on ECB which is expected to leave policy unchanged but maintain its dovish stance. Our colleague Kathy Lien notes that “According to the rates markets, ECB dated Eonias are pricing in a 10bp rate cut in 2021. Could the central bank lower interest rates next year? Possibly but a rate cut this week is certainly not on the table. The only scenario where the central bank could lower interest rates over the next 3 to 6 months would be if there is a full-blown second virus wave and everyone returns to hard lockdowns and the markets crash 20 to 30 percent. These scenarios are possible and some market watchers would assign it greater than 50% probability but until they transpire, it ECB will save its ammunition.

With that said, President Lagarde has every reason to be dovish. Europe is in the midst of a second wave, Brexit talks are breaking break, posing a threat to the entire region, the euro is strong, growth is moderating and inflation is weak. The second quarter was a rough one for the Eurozone and while Q3 will look better from almost every angle (except inflation) the risk of a correction in the markets and virus cases hampering economic activity makes it hard to trust that the improvements in August PMIs are durable. “

EURUSD was quietly bid ahead of the meeting holding above the 1.1800 figure and it’s doubtful that Ms. Legarde will want to give the bulls any further ammunition given the elevated exchange rate of the cross, but the very fact that she is unlikely to offer any further easing programs, for now, could be enough to push the pair towards the 1.1900 level as the day proceeds.

Boris Schlossberg
Managing Director

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