SCOREBOARD: Mario's markets

The ECB chief's all-costs commitment to the euro took market risk to a new – insane – level, but the game isn't over yet.

Stock markets had some vigour about them last night, following the tentative gains of the previous session and it all comes down to one man. Mario Draghi.

As the chief of the ECB his words matter, especially when he says things like the ECB will do "whatever it takes” to preserve the euro. Of particular importance, he also suggested that if bond yields remain high and obstruct the monetary policy transmission mechanism, then a solution to that would fall within the ECB’s mandate.

Risk on! And gains were extraordinary in some cases. French stocks shot up 4 per cent on the CaC, Spanish stocks were up 6 per cent, the Dax was up a more modest 2.8 per cent and the FTSE was up 1.4 per cent. Within that, banks did especially well, even Spanish banks if you can believe that, with Banco Santander up 11 per cent despite reporting a 93 per cent drop in profit!

Great moves but let’s be honest there is nothing to celebrate here. This is insane, markets have become completely irrational and unfortunately moves like this just add to the case for more regulation. Obviously this kind of volatility isn’t good for business at the end of the day and I know it is a very common view in Europe (and increasingly in the US) that financial markets have ceased to serve a useful function. Indeed, in the view of some, they pose an ongoing threat to the real economy. A threat that shouldn’t be allowed to continue. So my prediction if it does, and as I have highlighted this previously, is much more market regulation. I mean what are the headlines going to be tomorrow after some German politician says there are limits to what the ECB can do? Whatever your view on market regulation, or the economy more broadly, I think we can all agree the market is a complete circus at the moment. If it’s not government manipulating them it’s the big global banks.

Over in the US, markets were buoyed by that comment, obviously, and some not-so-shabby data. US jobless claims for instance dropped 35,000 in the week to July 21 to be at 353,000. This series has been quite volatile of late, but smoothing it out, the average over the last four weeks is at 367,000. It’s a good number and consistent with ongoing robust improvements in the jobs growth. Durable good orders for June were also out and beat expectations to rise 1.6 per cent. Most of it was transport though and excluding transport, orders were down 1.1 per cent. A mixed result then. Shipments however were good, rising 1.2 per cent after a 1.1 per cent increase.

At the bell, the S&P500 and Dow were both up 1.7 per cent (1360 and 12887) respectively, while the Nasdaq rose 1.4 per cent (2893). As for the earnings figures out overnight, they were mixed. Companies like 3M, Exxon Mobil reported solid earnings, Amazon not so solid. But look, that was pretty much it, price action elsewhere you can probably guess. US Treasuries sold off and the 10-year yield rose a few basis points to 1.44 per cent, same with the 5-year which is at 0.59 per cent while the 2-year yield is at 0.23 per cent. Aussie futures saw a bit more action and the 3s fell about 9 ticks to 97.72, while the 10s were down 6 ticks to 97.21.

As for forex and commodities, the Australian dollar rose about 45 pips to 1.0398 and the euro put on about 160 pips – go figure. It seems that if a central bank hints that it might print, that’s good for purchasing power. Commodities too were higher but we’re not talking massive magnitude or anything. Gold was up almost $US7 to $US1614, copper rose 0.5 per cent, crude was up 0.5 per cent and WTI at $US89.

Other data out was light and included pending home sales, which fell 1.4 per cent in June after a 5.4 per cent increase the month prior. Then in Germany, consumer confidence was up slightly to 5.9 from 5.8.

The calendar today is, once again, quite light for our region. There is some Japanese data on inflation and retail sales but it’s very low in importance. Tonight, we get German inflation, which has so far been stuck at the top of the band for some time. US GDP is also out for and growth is expected to slow to 1.4 per cent in Q2 from 1.9 per cent in Q1.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

@AdamCarrEcon on Twitter.

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