A sleepy-looking market on Monday has woken up today, stimulated by ECB President Draghi's suggestion that the ECB could/would provide more monetary policy stimulus if economic conditions deteriorate and the ECB's ability to meet the inflation mandate is threatened.
How does a comment from a European central banker have such a positive impact here? The answer is manifold, yet it boils down to two factors: (1) it has stoked the idea that we are potentially on the cusp of a new round of coordinated policy easing and (2) it has contributed to a further drop in interest rates, which is supportive for risk assets.
The 10-yr note yield is down six basis points to 2.03% in a move that has mirrored an eight basis points drop in the German bund yield to a record-low -0.32%.
The S&P futures are up 17 points and are trading 0.7% above fair value. The Nasdaq 100 futures are up 82 points and are trading 1.2% above fair value. The Dow Jones Industrial Average futures are up 143 points and are trading 0.6% above fair value.
The current indication should translate into an open above the 2900 level for the S&P 500. The real focal point, however, will be whether the S&P 500 can sustain a posture above 2900 on a closing basis. It failed to do so on two separate occasions last week.
There is apt to be a higher degree of confidence in the notion that today is the day, however, for several reasons:
- There is the policy stimulus factor. The ECB showed its cards; the minutes from the Reserve Bank of Australia's June meeting pointed to the likelihood of more policy easing relatively soon; and the Fed is widely expected tomorrow to reinforce the market's prevailing belief that a rate cut is in the cards relatively soon.
- Facebook (FB) is up another 2.0% as investors remain enthralled with the potential of its cryptocurrency push.
- Growth stocks appear ready to lead as low interest rates, borne out of low-growth expectations, act as a tailwind for multiple expansion.
- Housing starts and building permits data for May didn't upset the market's rate-cut expectations.
With respect to the economic news, housing starts dipped 0.9% m/m to a seasonally adjusted annual rate of 1.269 million (Briefing.com consensus 1.240 million) from an upwardly revised 1.281 million (from 1.235 million) in April. Permits increased 0.3% m/m to a seasonally adjusted annual rate of 1.294 million from an upwardly revised 1.290 million (from 1.269 million) in April.
Single-family starts fell 6.4% m/m to 820,000 and were down 12.5% yr/yr with declines seen across all regions.
The key takeaway from the report was that the number of units under construction at the end of the period held at a seasonally adjusted annual rate of 1.131 million for the third straight month. That left the second quarter average 1.5% below the first quarter average, which will be a negative input for Q2 GDP forecasts.
The housing data didn't have much impact on the futures trade, which has been rooted in the idea that the near future is going to produce lower interest rates from the world's leading central banks.
The basis for further rate cuts seems all but irrelevant to this market, which is still riding the policy put for all it is perceived to be worth -- and likely will until the data devalue its psychological impact.