ECB underpins risk assets while pushing yields and EUR lower

The ECB surprised by being much more dovish than we expected yesterday and more or less pre-announcing easing in December.

"We now look for a deposit cut from the ECB of 10bp on top of an extension of the QE programme beyond September 2016", says Danske Bank.

The message from the ECB gave a boost to pretty much all assets: stocks, credit, peripheral bonds and sovereign bonds and should continue to do so in the short term. If economists are right that China is bottoming now, this will underpin further performance of emerging markets asset as the growth fears around China are likely to ease a bit. US and euro stocks are supported by easier policies but, on the other hand, the falling macro momentum in the US and Europe will dampen stock performance in these regions. Overall, though, we are still moderately positive on global stocks in the medium term.

Bond markets should also continue to find support in more ECB easing and falling growth. Selling from central banks in Asia has also dampened as capital outflows out of China have come down; hence, the need for currency intervention is reduced.

"EUR crosses fell sharply on Thursday following the ECB meeting, with EUR/USD leading the way, while the EUR also fell sharply versus commodity currencies such as CAD and BRL as risk appetite rallied. As we now expect the ECB to cut the deposit rate by 10bp to -30bp at its meeting in December and keep the door open for further cuts and announce an extension of the QE purchases beyond September 2016, we have lowered our 1M and 3M EUR/USD forecasts to 1.10 and 1.08, respectively, as a further deposit rate cut is more EUR negative compared with our previous call of an extension of the QE programme. However, we maintain our 6M and 12M EUR/USD forecasts at 1.12 and 1.20 as medium-term fundamentals support a higher EUR/USD", projects Danske Bank.