Since Tuesday’s close, Asian and European stocks have hovered around flat. Most currencies have been flat except for the Euro, which is down to 1.25 vs. the Dollar, and I would also note that Spanish and Italian sovereign bond yields are moving higher again (Spain 10 year has gone from 6.25% to 6.55% in the past 2 days).
It’s already been a relatively active morning, as China lowered its one-year benchmark rate by 0.31% in a 7 am EST release, cutting rates for the second time in a month as they try to counteract slower growth. That sent S&P futures up 7 handles, and aided a bit of a risk-on rally overall. The Bank of England initiated another 50 billion pounds of QE, as expected. But the big kahuna today is the ECB decision at 7:45 am, and more importantly the press conference where Draghi speaks starting at 8:30 am.
Interestingly, the last time China cut rates (June 8th), the Chinese related stocks and commodities actually had a big selloff by the close. Will the market interpret today’s news as an even worse signal for future growth, or a positive due to more potential stimulus? Watch FXI and copper prices for the clue.
As for the ECB, a 0.25% rate cut is the base case. The most bullish forecasters will be looking for comments from Draghi for LTRO3 or a re-start of the SMP program to buy sovereign bonds. If all the markets get are a rate cut, then the risk-on rally is likely to end for today. Watching how sovereign bond yields react is likely the most important first clue.