Words will not stem DAX descent

Were news reports before the ECB’s policy statement on Thursday inaccurate?

Either news reports before the ECB’s policy statement on Thursday were inaccurate, or it will be left to the bank’s president Mario Draghi to inject a note of caution on increasing concerns about the euro’s strength at the press conference in a short while. But can even these trip up the euro much? For European investors, particularly in export-dependent DAX stocks, it’s the key question of the day as the index appears to rebound from a summer of selling.

Euro bears have spotlighted the amendment of wording in Thursday’s statement make the bank’s long-standing facility to expand stimulus at its discretion at any time more explicit: "If the outlook becomes less favourable...the Governing Council stands ready to increase the programme in terms of size and/or duration". The impact on the euro so far has been minimal. 

The question for European stock markets though is how strong a warning shot can the ECB afford? The ECB’s own rules tie its hands. And signs continue to emerge that its ability to keep buying bonds is approaching limits. The bank reduced buying of German bonds to an all-time low last month. It has also been buying fewer Italian and French bonds, all this suggesting it is holding back purchases due to the possibility that it could run out of eligible paper. Asset purchases are the main policy watch point given the ECB’s own December cut-off for the programme at its current €60bn/month rate.

Still, after an 8% trade-weighted euro rise this year, recent unofficial signals are not the first the ECB has emitted about concerns on the euro. The perceived depressive impact on exports and by implication inflation, hits directly at the central bank’s key mandate, and the chief anxiety of investors. These anxieties clipped the wings of key European indices in the spring, sending them lower until late last month. With Eurozone growth meeting targets, the best employment figures this decade and deflation off the table though the central bank would have to bend policy frameworks even more to justify leaving extraordinary accommodation in place for much longer.

As it stands, the ECB has in fact not given any indication of a delay beyond the end of the year for beginning to remove stimulus. It has however, reiterated comments about asset buys though it has not added a separate note about capacity to reduce them.

One additional tool of implicit guidance may be deployed in the press conference. Draghi could also concede that he has asked policymakers to begin drawing up detailed options for withdrawal. With neither DAX nor euro having moved much so far that indication could break the stalemate.

The DAX has rallied some 120 points so far on Thursday, right into resistance around 12345-12361, as shown by the chart below. We expect the index to pivot on one side of the threshold in the near term depending on the ECB’s coming commentary and the impact on the single currency.

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