Daily Market Color

Slight Risk On Tone Ahead of Tomorrow’s ECB Announcement

Jeff Davenport

US stocks rebounded while Treasuries gave up some of yesterday’s gains as investors are bidding up risk products anticipating supportive action coming out of tomorrow’s European Central Bank meeting.  The ECB is widely expected to announce fresh stimulus measures, with speculation regarding the size and scope of such further support.  There is considerable pressure on ECB President Draghi not to disappoint after December’s stimulus announcement underwhelmed market-participants and sparked a large selloff.  After an additional three months of declining consumer prices and a worsening outlook, the ECB is at risk for losing credibility regarding its willingness to act decisively.  The most likely outcome is an expansion (both in size and duration) of monthly bond purchases and a further cut to the already negative deposit rate.  It is less likely, although possible, that the ECB will expand the breadth of asset purchases to include corporate bonds.

A rebound in crude oil also added to today’s risk on sentiment.  WTI and Brent are trading up over 4% and 3%, respectively, after a large draw in gasoline inventories signaled improving energy demand.  Gasoline inventories fell 4.5 million barrels, easily exceeding the 1.4 million analysts were expecting.  Crude prices were also supported by speculation that the world’s largest producers might soon agree to an output freeze.  An Iraqi oil official said there is a meeting planned in Moscow on March 20th between OPEC and non-OPEC producers to discuss a proposal.

The US economic data calendar remains light and there is a $20 billion 10-year note auction this afternoon.  All three major US stock indexes are up less than 1%, while Treasury yields and swap rates are 3-5 bps higher across the curve.

Jeff Davenport

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