The ECB creates a new paradigm for share markets

Mario Draghi’s strong indication that the ECB is likely to add further monetary stimulus will create a sense of urgency for potential stock market buyers who have been sitting on the sidelines.

Traders will now be on alert to assess the sustainability of today’s share market rally.  Despite three attempts to do so, the ASX 200 index has been unable to move clearly above resistance around 5305 since late August. This is now setting up as something of a psychological barrier for the market. An emphatic move above this level over coming days could easily lead into a strong finish to the year for stock markets. However, traders will also be alert to the possibility that the Index will only achieve a limited break above this level in coming days, continuing to oscillate around this resistance and failing to set up self-fulfilling confidence.

Last night’s statement by Mario Draghi now poses a clear question for markets about the extent to which the Fed will diverge from other central banks. Mr. Draghi made it clear that global economic conditions and their impact on inflation were a major influence on the ECB’s dovish stance. While the Fed has made it clear that its policy is driven mainly by the US domestic economy, it runs the risk that a strong $US will bear down too heavily on the economy if it appears unmindful of global conditions and divergence with other central banks. The most bullish scenario for stock markets could be one where last night’s ECB statement contributes to further delay in the anticipated Fed rate hike. 

Yesterday’s move by CBA to increase mortgage rates by 0.15% will confirm a view that banks will be able to share the cost of future regulatory safety initiatives between customers and shareholders. This will help reduce the degree of regulatory risk factored into investor thinking on bank valuations.

Commodities had a limited reaction to last night’s ECB announcement and this may be somewhat of a limiting factor for today’s stock market rally. Spot Iron Ore prices have continued to drift lower and have fallen 7.3% so far this month.