Draghi Getting Too Much Credit for this Move

Draghi’s comments today hinting at the use of tougher firewalls are being given far too much credit than they deserve in lifting the euro by over 1 US cent or 0.90% and in boosting global equities by as much as 4% (Italian index).

The rally already began 24 hours ago, when the euro gained +0.80% on Wednesday (highest one-day percentage gain in four weeks) on comments by ECB’s Nowotny making the case for granting the ESM banking license to give it access to ECB lending. Yesterday’s rally was also caused by rumours about a third LTRO starting next month.

“Doing more” seems all that it takes for markets to push higher.

WSJ Jon reporter Hilsenrath (dubbed as the unofficial FOMC member) was also instrumental in yesterday’s move by stating that the Fed may be ready to press on for more QE by next month’s Fed symposium in Jackson Hole, Wyoming.

BOTTOM LINE:
Barring doubts about the long term effectiveness of the Fed’s QE3 and the efficacy of the ECB’s next LTRO, markets are aware of the obligatory rebound in equities and risk appetite once these policy measures are unleashed. As such, the inevitability of further central bank stimuli cannot be ignored by equities, which explains our ongoing stance that G10 equities shall remain supported at last into end late Q3 (avoiding any declines of more than 5% from current levels).

EUR/USD attempting its first weekly gain after three straight weekly declines, facing the next barrier at 1.2380 (trendline resistance extending from late June). The more meaningful barrier follows at 1.2470, coinciding with the 55-day moving average– a technical level not broken since May. Weekly and monthly stochastics remain negative across the board, which suggests that any rallies are seen underpinned below 1.25.

FTSE-100 eyes immediate resistance at 5625-30, which is the confluence of the 100 and 200-DMAs. Weekly oscillators continue to suggest a medium term flattening of the June rally. Any extended gains are seen topping out near out the 100-WMA (5690). Short term downside seen supported at 5430 for now.