Eurozone stocks subdued ahead of tomorrow's ECB rates decision

Wednesday, October 21, 2015

Eurozone stocks traded lower for a third day yesterday as investors chose to remain side-lined ahead of tomorrow’s ECB rates decision and subsequent press conference from President Mario Draghi. Benchmark stocks in the region traded under renewed pressure after a survey on bank lending by the ECB indicated credit in the region was improving. The central bank went further and stated that its QE programmed could potentially act as a drag on bank profits over the coming six months and was generally received by the market as a dampener for more stimulus. However, investors are hopeful that Mr Draghi offers further assurances and will be watching tomorrow’s press conference closely for any further insight. The euro attempted to recover previous losses towards 1.4000 against the dollar, however, the single currency gave back the majority of these early gains during the US session. Activity early this morning has seen the euro stabilise around yesterday’s close, attempting to push higher towards 1.1370.

A growing fear of Chinese bond defaults saw a sharp decline in appetite for mainland Chinese stocks as both the Shanghai Composite and CSI 300 benchmark indices traded between 3.8%-4.3% lower overnight. Sinosteel Co., a state owned mining and trading group which is also the second largest importer of iron ore in China, failed to pay interest on a 5.3% note with a notional value of 2bn yuan ($315m) due yesterday as it pushed back the deadline while also announcing it would bolster collateral for the note. While Sinosteel’s failure to pay interest on time is classified as a default, some noteholders have agreed to delay payment of interest. The sectors at most risk from default are coal, steel and shipbuilding and given the prolonged rout in commodities prices coupled with a lacklustre demand outlook we could see the default of similar state-backed enterprises over the coming year.

The dollar index continues to face firm resistance towards 95.00 after recovering swiftly from the recent six week low towards 83.806. The greenback slipped towards 94.594 yesterday as mixed US housing data prompted some retreat ahead of tomorrow’s initial weekly jobless claims data and as we head into the blackout period ahead of next week’s FOMC rates decision and subsequent press conference. Activity this week has seen the dollar index struggle to move past 95.00 with a firm pound in part contributing to the lack of upward momentum as sterling holds onto to last week’s gains and continues to be well supported towards the 50 day MA, trading around 1.5427 early this morning. On any breach of 95.00 we could see moves on the upside see the dollar index revisit territory towards 95.700 against a basket of major currencies as investors look to tomorrows release of the Chicago Fed national activity index and initial weekly jobless claims as well as Friday’s release of manufacturing PMI data.

EUR fails to hold onto yesterday's intraday gains

EUR Curncy Euro Spot Daily 21 2015 10 21 07 56 13

Dollar index struggles to breach resistance towards 95.00

DXY Curncy DOLLAR INDEX SPOT 2015 10 21 08 10 58

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Topics: EUR, DXY, GBP
More from: Kash Kamal