LCG: ECB doves disappointed despite dovish statement, US GDP could confirm sharp slowdown, but price index is also important.

July 26, 2019

Euro remained relatively steady after the European Central Bank (ECB) President Mario Draghi hinted at lower interest rates in the coming months at his post-decision press conference on Thursday. Draghi stated that the outlook is getting ‘worse and worse’ citing the slowing global growth, trade wars, the rotation of the Chinese economy and the rising possibility of a hard Brexit. Draghi’s statement was dovish, but markets had bigger hopes ahead of the meeting. The DAX dropped 1.28% on doves’ disappointment posterior to the ECB decision.

Nonetheless, the ECB is preparing to pull the interest rates lower and to announce further asset purchases at its next meeting. The probability of a 10-basis-point cut jumped to 85% for September meeting according to the activity in Eurozone sovereign bond markets. This means that the single currency will likely remain under pressure for the rest of the summer. On the back of their heads, euro bears will be keeping the possibility of a decline to the 1.10 mark against the US dollar. But first, they want to hear what the Federal Reserve (Fed) President Jerome Powell has to say at next week’s FOMC meeting.

It is highly likely that the Fed lowers its policy rate by 25 basis points next week. The probability of a 50-basis-point cut stands at a relatively low 17.5% level. But this could change fast. Due today, the US GDP data could confirm a sharp slowdown from 3.1% to 1.8% q-o-q in the second quarter. Such disenchantment could boost the Fed doves before the weekly closing bell, but the extent of enthusiasm will also depend on the price index data. If the personal consumption expenditure (PCE) jumps to 2.0% q-o-q from 0.9% printed earlier, hinting at firming inflationary pressures, the Fed doves could be contented with the idea of a 25-basis-point cut in July.

S&P500 (-0.53%), Dow Jones (-0.47%) and Nasdaq (-1.00%) eased from record highs on Thursday’s session. Intel and Alphabet’s second quarter earnings pleased, but Amazon fell short of analyst expectations. Technology and energy stocks led losses in New York.

McDonald’s and Twitter will post their second quarter results today.

Asian stocks followed up on US session losses, except from energy and mining stocks.

Nikkei fell 0.50% despite a cheaper yen, as Japanese companies’ results failed to meet the already-low investor expectations. 20 companies out of 224 in Nikkei posted results this far; the overall sales missed estimates by 3.24%, as earnings surprised down by a solid 14%. The negative influence of slowing China combined with a stronger yen and the trade dispute with South Korea has been real for Japanese companies. Investors now turn their attention to next week’s Bank of Japan (BoJ) meeting.

Elsewhere, the FTSE is expected to open steady near 7489p. Technology stocks will likely remain under pressure following the free-fall in Sage’s stock price posterior to announcing a sharp drop in software revenues yesterday. But energy stocks could provide some support following a relatively positive session in Sydney.

Vodafone is due to release results this Friday. Investor expectations are low after the company cut its dividend by 40% and warned that the improvement in organic revenues will be gradual after headwinds in Spain and South Africa, pushing the can down to the second half of this year.

The DAX is seen slightly better bid following Thursday’s reaction sell-off posterior to the ECB decision.

The pound continues struggling in the eye of a political storm. Cable remained offered below the 1.25 mark as the new Prime Minister Boris Johnson reshuffled his cabinet to deliver much-promised Brexit by the October 31st deadline, with or without a deal. But the possibility of a comprehensive deal between the UK and the European Union wanes by the day. Boris Johnson will certainly wear his hardest Brexit face to rip the UK apart from the EU if his demands are not met. And the EU isn’t willing to compromise on its withdrawal agreement. EU’s Juncker repeated on Thursday that what has been proposed is the best and the only deal possible at this point. If it comes down to a take-it-or-leave-it choice, which it certainly will, then Johnson will walk out the door without a deal and that could result in a massive shockwave for the British economy and recession. Large 1.25-put option due to expire today should keep Cable under pressure before the closing bell. 

Opening calls

FTSE is expected to flat at 7489               

DAX is expected to open 36 points higher at 12398