Markets rebound! Oil and Draghi pull equities off their lows

A sharp rebound in crude oil as well as some warm words from ECB President Mario Draghi turned out to be the perfect ingredients to prompt a sharp snapback in equity markets yesterday after Wednesday’s rout, and this rebound has spilled over into the Asia session with crude oil recovering above the $30 level.

The big question now is whether this marks a medium term base, or just a minor relief rally before another leg lower? 
Given yesterday’s rebound and the subsequent positive session in Asia there now remains the very real possibility that we could well finish the week in positive territory, and if that happens it would be a remarkable turnaround after Wednesday’s carnage..
 
While the ECB left interest rates unchanged, Mario Draghi, the President of the central bank made it quite plain that given the recent drops on oil prices that the policy response in March will potentially have to change, replacing “whatever it takes” with “no limits” to the potential for further action within the banks mandate, prompting all manner of channelling of the 1993 hit No Limit by 2 Unlimited on social media.
 
Of course there is a risk that in being so dovish he could well be setting himself up for the similar sort of disappointment that characterised the December decision, given that the opposition to further cuts in the deposit rate and further stimulus are hardly likely to have dissipated by then. What is not in doubt is that the latest inflation projections are likely to show that inflation will take longer to return to target when they are published in March, but will they be enough to sway the doubters on the council to fall in line and back further action, if it is felt it is necessary.
 
The fact that the euro failed to follow through on its initial sell-off lower after the comments would appear to suggest that markets have their doubts as well, as to whether Draghi can stand and deliver.
 
Mr Draghi said it himself when he said that the low oil price would support consumption and investment, which begs the question as to why further stimulus is even necessary given that, according to the central bankers playbook, that low energy prices are transitory, and Europe as a net energy importer is likely to feel the economic benefit.
 
In any event market attention is likely to remain on the ECB President later this morning when he gives a speech from Davos, at the World Economic Forum.
 
On the data front we will be getting the latest January manufacturing and services flash PMI’s from France and Germany. The German numbers are expected to remain fairly solid at 53 and 55.5, while the data from France is likely to remain weak. Services due to the continued fallout from the November terrorist attacks at 50.2, while the manufacturing number is expected to come in at 51.3.
 

By Michael Hewson, Chief Market Analyst at CMC Markets UK