ASX Markets

US stocks rose to fresh highs overnight, extending gains as the European Central Bank (ECB) said it would extend the duration of its stimulus program but reduce the monthly volume.

Both US and European stocks initially sold off as investors concluded the bank was tapering its program of quantitative easing , but reversed quickly during Mario Draghi’s press conference. The ECB chief made clear that the extension of the program by 12 months would add more stimulus even though the monthly purchase rate would drop from €80 billion per month to €60 billion per month. This pencils out to €560 billion in fresh stimulus compared to the market’s expectations €480 billion.

The Stoxx Europe 600 index gained 1.2% to close at its highest level since January.

Looking forward, we see the ECB decision as generally positive for the ongoing bullish theme for G-7 stock markets.

XJO has now traded through the 5520 level and next resistance is 5610.

US and European equities pushed higher as investors showed confidence ahead of today’s key European Central Bank (ECB) meeting in Frankfurt, Germany. All the major indices including the FTSE, DAX, CAC, DOW and SP 500 posted gains in excess of 1.5% on the day.

The ECB is widely expected to announce an extension of its massive Quantitative Easing (QE) stimulus program and may even increase, or expand, the scope of the asset pool to include European corporate bonds and equities.

The ECB has been the most aggressive central bank in providing monetary stimulus this year. Since March, it has been buying €80 billion of assets per month, mainly in the form of Government debt. Although the program is scheduled to expire in March 2017, analysts are expecting at least a six-month extension to be announced today.

As a note of caution, it’s important that ECB chief Mario Draghi rejects any talk about an early tapering of the monthly asset purchases. Just the rumor of a “scaling back” of stimulus before the September ECB meeting sparked a sharp sell-off in G-7 equities and credit markets.

However, with the US FOMC meeting scheduled for next week, our base case is that the ECB statement will not mention tapering and, instead, focus on the technical adjustments to the QE program. On balance we expect this scenario to have a neutral to bullish impact on G-7 equity markets.      

Without a sitting government, it’s difficult to see how there can be any official help for Italy’s beleaguered banking sector. In short, now that the “No” vote has prevailed, Italy’s banking system is for all intents and purposes insolvent.

In addition, the size of Italy’s government debt is also a concern. Depending on which figures you look at, the total outstanding Italian debt is more than €2 trillion, which will have to be serviced even if the Italian voters someday choose to leave the European Union.

On balance we feel that the brunt of the market fallout will be felt across the European Union. However, after the sharp rally in global stocks during the month of November, this referendum news could very well trigger some re-balancing of of financial positions going into the upcoming ECB and the FOMC meetings.