Global Markets Overview – September 5, 2014

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By Evan Lucas, IG Markets Strategist | September 5, 2014 9:49 AM EST

Traders are calling the euro the gift that keeps on giving after yet another slide on the back of yesterday's meeting.

The ECB meeting was promising to deliver fireworks and did just that as the central bank surprised by cutting rates and announcing a private QE. Expectations were high heading into the meeting and the ECB certainly went above and beyond. It delivered cuts to the main refinancing rate (10 basis points), marginal lending facility (10 basis points) and also pushed the deposit rate (10 basis points) deeper into negative territory.

On top of that, the ECB will engage in private asset-backed securities and covered bond purchases which will run in conjunction with the TLTRO. The ECB hopes this will help expand its balance sheet by EUR1 trillion, which would match early 2012 levels. However, it seems the technicalities of the expansion are yet to be completely worked out, with details set to be fleshed out at the October meeting.

Equities rally while the euro slumps

The price action in response was quite impressive with big rallies in equities. The MIB and IBEX outperformed after peripheral bond yields cooled significantly on the back of the news. The single currency took an absolute bath, with EUR/USD sliding to $1.2920, its lowest since July 2013.The momentum was just too much and the break below this week's lows just saw the selling accelerate.

Traders will now be eyeing July lows at $1.2755 as the pair shows no signs of bouncing right now. As the ECB fleshes out its QE in October, the Fed will be winding down its own QE program. This just emphasises the kind of divergence to expect from this currency pair and shows just how much more room there is for another leg lower. Not only has the ECB taken a big step, it appears that some members were in favour of doing more and Draghi himself said further unconventional instruments may be used  to alleviate risks of low inflation. As a result, it is clear the euro will remain a funding currency of choice and traders will continue to look for selling opportunities.

Greenback rally continues

While Europe was on fire, the momentum seems to have waned in some key markets, particularly the US, where positive economic data and some hawkish Fed commentary weighed on equities. This pushed the USD higher and saw USD/JPY reclaim the 105 handle, trading to a high of 105.37. In response, the Nikkei is facing a monster gain at the open with our current call pointing to a 2% rise to 15,752.

The ASX 200 is only pointing to a 0.1% gain at the open to 5637, with the continued resilience in the AUD not helping the situation. Iron ore extended its losses to 84.30 and this will continue to rattle confidence in the materials space.

Fortescue might give up some of yesterday's gains today and traders will keep a close eye on that $4 level. Gold also traded near an 11-week low and this will hurt the precious metals names. However, the financials might find some buying interest with the prospect of cheap funds and an increase in supply out of Europe encouraging investors.

Asian markets opening call

Price at 8:00am AEDT

Change from the Offical market close

Percentage Change

Australia 200 cash (ASX 200)

5,636.80

6

0.10%

Japan 225 (Nikkei)

15,751.70

302

1.95%

Hong Kong HS 50 cash (Hang Seng)

25,352.60

35

0.14%

China H-shares cash

11,421.70

109

0.96%

Singapore Blue Chip cash (MSCI Singapore)

378.65

0

0.07%

US and Europe Market Calls

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

WALL STREET (cash) (Dow)

17,103.40

26

0.15%

US 500 (cash) (S&P)

2,000.98

1

0.05%

UK FTSE (cash)

6,879.90

3

0.05%

German DAX (cash)

9,726.00

119

1.24%

Futures Markets

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

Dow Jones Futures (September)

17,086.50

18.50

0.11%

S&P Futures (September)

1,999.38

0.75

0.04%

ASX SPI Futures (September)

5,634.00

2.50

0.04%

NKY 225 Futures  (September)

15,730.00

72.50

0.46%

Key inputs for the upcoming Australian trading session (Change are from 16:00 AEDT)

Price at 8:00am AEDT

Change Since Australian Market Close

Percentage Change

AUD/USD

$0.9346

0.0005

0.06%

USD/JPY

¥105.300

0.455

0.43%

Rio Tinto Plc (London)

£32.43

-0.13

-0.40%

BHP Billiton Plc (London)

£19.40

0.49

2.59%

BHP Billiton Ltd. ADR (US) (AUD)

$35.75

-0.27

-0.76%

Gold (spot)

$1,261.10

-10.10

-0.79%

Brent Crude (October)

$101.84

-0.25

-0.25%

Aluminium (London)

2106

26.75

1.29%

Copper (London)

6943

40.00

0.58%

Nickel (London)

19365

285.00

1.49%

Zinc (London)

2405

37.25

1.57%

Iron Ore (62%Fe)

84.3

-1.40

-1.63%

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(Photo: Reuters / Ralph Orlowski)
A placard reading "You speculate with our lives" stands next to huge euro logo in front of the headquarters of the European Central Bank (ECB) before the bank's monthly news conference in Frankfurt August 7, 2014. The European Central Bank left interest rates unchanged on Thursday, holding off fresh policy action as it prepares to launch fresh funding for banks next month that it hopes will lift inflation from rock-bottom levels.
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