Stocks surge on central bank support

First, Super Mario (Draghi) came to the rescue. Now the People’s Bank of China has eased its policy further, cutting its reserve requirement ratio by 0.5% and the benchmark deposit and lending rates by 0.25%. This is music to the ears of the stock market bulls. Indeed, the European markets, which absolutely surged higher on Thursday, have sharply extended their gains today. In addition to the central bank support, latecomers are joining the rally and the sellers are continuing to forcefully or willing abandon their positions as key technical resistance levels break down across the major indices.  In FX, the EUR/USD is testing a major support and trend line at around 1.1070 and if it breaks through here then further sharp falls are likely to be seen, and the weaker euro could further boost the equity markets as it would raise the attractiveness of European exporting companies. It could be just a matter of time to see the breakdown of the euro because the Euro zone government bond yields have dropped to fresh record lows today. In fact, yields on two-year debt are now below zero for nearly the entire euro zone. Yield-seeking investors are thus forced to move their funds into assets that pay higher yields, such as stocks. And although there have been some concerns about the profitability of US companies this earnings season, most of the major tech giants have lived up to and surpassed expectations. Google, Amazon and Microsoft all beat their earnings expectations last night, which helped to push US index futures further higher. Apple reports next week and Facebook the following week. So there’s plenty of micro stimulus there to give further direction for the markets. In addition to earnings, the economic calendar looks quite busy next week too with German Ifo and CPI, UK GDP, and US Consume Confidence and Advance GDP being among the data highlights. On top of this, there will be more central bank policy decisions to look forward to as well from the Fed, BOJ and RBNZ.

The ECB president was of course super dovish yesterday as he said that a whole menu of measures may be necessary to achieve the inflation target. He said that the bond buying programme is set to last until September 2016 or beyond if needed. It could be adjusted in size, composition and duration. In our view, more gains should be seen for the stock markets now as investors move back into higher yielding assets. Indeed, as we reported the possibility yesterday, the DAX not only reached but it has now clearly broken the double bottom neckline at around 10500/20 and it has taken out further resistance at 10660. These levels could turn into support upon re-test. There is not much resistance seen in the immediate near-term, at least not on the daily chart, but potential headwinds to keep an eye are around 11075 to 11225 (area circled on the chart). This is where the bearish trend meets the 200-day average and the 61.8% Fibonacci retracement of the down move from the record high. If and when this area is cleared then a run towards the all-time highs would be a possibility. The market may be a bit overbought, says the RSI indicator. So, short-term bullish speculators may wish to proceed with a degree of caution from here.