Overnight Headlines

*Asian stock markets follow Wall Street higher, investors rotate out of growth

*ECB’s Villeroy suggests markets may have overreacted to the ECB

*Australia consumer sentiment drops on mounting rate rise fears

*Dollar hits one-month high to yen as US bond yields rise   

US equities rose as strong corporate earnings boosted sentiment. The S&P500 climbed 0.8% while the tech-heavy Nasdaq rose 1.3% and the small caps index, the Russell 2000 advanced higher by 1.6%. Banks and materials were the leading sectors with energy for once the laggard on falling oil prices. Asian markets are broadly higher with Hong Kong stocks leading the way. Both European and US futures are in the green.

USD strengthened modestly in a quiet session as the DXY remained above long-term trendline support. EUR/USD is currently clinging to the 100-day SMA support at 1.1419 but cable has bounced off this indicator above 1.35. AUD and NZD all rose, especially against CAD which suffered on declining crude prices.

Market Thoughts – Euro resilient despite ECB speak

We’ve had more ECB officials endeavouring to dial back on the more hawkish tone emitted from last week’s meeting. President Lagarde stressed the notion about sequencing at the start of the week, meaning there would be no rate hikes before the end of asset purchases.

Yesterday, Bank of France governor Villeroy stated that the market had overreacted to the change towards a more hawkish ECB last Thursday. He repeated Lagarde by saying that the bank is flexible about the pace it moves between different steps to policy normalisation.

The euro is just about holding up so far this week though it is the worst performing major in a quiet market. We note that investors are getting more worried in the peripheral bond markets as concerns grow that the ECB is too aggressive, which could trigger volatility that worsened the eurozone debt crisis a decade ago.

Chart of the Day – Oil stumbles at the highs

 Oil markets have enjoyed a stellar start to the year and finished last week off strongly, with Brent up another 3.6% over the week. Sentiment in the market has generally been bullish though concerns over spare capacity and continued geopolitical risks in Russia linger. The options market is also proving helpful, with sellers of $100/barrel calls having to hedge their positions as the market nears the magical $100 level.

Of course, markets don’t move in a straight line and comments from Russia that an Iran nuclear deal could be close shook the bid. A deal that would allow Iran to recover output could send oil lower. Together with more positive signs in Ukraine tensions, Brent came off recent highs at $93.96. Near term support is $88.56 and $86.68 with overbought conditions needing to ease if we are to get closer to $100.