Markets update: Sentiment still buoyed by hints of Fed cut ahead of ECB and NFP

Yesterday’s big rally serves as a reminder that the markets are literally addicted to cheap central bank money and hints of a rate cut in the US by a couple of Fed officials was enough to send the Dow 500+ points.

Yesterday’s big rally serves as a reminder that the markets are literally addicted to cheap central bank money and hints of a rate cut in the US by a couple of Fed officials was enough to send the Dow 500+ points. Investors are hoping, or betting even, that the European Central Bank’s Mario Draghi will deliver a dovish press conference on Thursday, pushing rate hike expectations further out. But with the US-China trade uncertainty still lurking in the background, are investors being unreasonably too optimistic?

Stocks up, dollar down

Well this morning finds European markets and US index futures higher, adding to their sharp gains from the day before. The US dollar has given back further ground, allowing the likes of gold and commodity dollars to rise, with the Canadian dollar outperforming. Even the Brexit-hit pound was higher, with the GBP/USD being up for the fifth day at the time of writing.

ECB to take centre stage

Looking ahead to the rest of the week, tomorrow’s ECB meeting has the potential to move the markets sharply, although with investors already anticipating the central bank to be dovish, we might not see too much of a reaction. In fact, the bigger risk as far as the markets are concerned is if the ECB turns out to be surprisingly less dovish than expected, although that would indeed be a big surprise given the cooling of inflation and anaemic growth in the Eurozone, not to mention ongoing Brexit and trade uncertainties.

Macro data in focus

As we head to the second half of the week, investors will also be focusing on incoming macro data, especially from the US and so they will be adjusting their interest rate expectations accordingly. If Friday’s jobs and wages data manage to trounce expectations, then the dollar could make a speedy recovery, otherwise more pain could be on the way for buck bulls. Ahead of that, we will see the release of ADP private sector payrolls report and ISM services PMI later on today, followed by a few not-so-important macro pointers a day later on Thursday. Meanwhile from the Eurozone, this morning’s final services PMI data was better than expected. On Thursday, as well as the ECB rate decision, we will have German factory orders and revised Eurozone GDP data. And German trade figures and industrial production, as well as a few other Eurozone numbers, will be published on Friday, ahead of the US and Canadian employment reports.

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