Stocks Ease along with the Euro as ECB Officials Try to Calm Nerves

European stock markets up from early lows, but DAX and FTSE 100 remain down compared to Tuesday’s close, after a cautious session in Asia, where the Nikkei closed with a loss of -0.35%. The Hang Seng staged a late recovery and managed to close up 0.25%, but traders are cautious as indices remain at very high levels amid warnings of overbought conditions. DAX and FTSE 100 are also slowly erasing earlier losses as insurance and tech company’s recovery and U.S. futures move higher, pointing to a stronger open. The DAX failed to get a lift from a weaker EUR and ECB officials trying to calm tightening speculation, although it is clear that the ECB is on the way to end net asset purchases this year and either at the end of September or via another reduced QE extension and that will bring rate hikes into focus in 2019.

WTI benchmark futures are down for a second day, at $64.44, which is a net loss of 0.5% on the day so far. This extends the correction from Monday’s 37-month peak at $64.89. This is the biggest correction oil prices have seen since mid-December, and the first back-to-back declines crude has seen since December 13th-14th. The EIA said yesterday that it expects U.S. shale production to increase by 111k barrels per day, which should help push overall U.S. production to record levels above 10 million barrels per day. While the overall bullish narrative remains rich the EIA forecast comes with crude markets have perhaps been looking increasingly ripe for a correction. CFTC data has been showing increasing records in speculative bullish positioning.

Eurozone HICP inflation was confirmed at 1.4% year over year as expected

The core rate remained steady at 0.9% year over year. The annual rate fell back from 1.5% year over year in the previous month, but after downward revisions to French and Spanish numbers there was some lingering speculation of a revised HICP Inflation is still far below the ECB’s upper limit for price stability, and the doves at the council are eager to move with caution as the ECB very slowly prepares to phase out net asset purchases. Deflation risks may be banned, but the weak core reading and recent EUR strength will argue against Draghi’s calls for a quick end to asset purchases.

ECB officials try to put a lid on the Euro. Vice President Constancio and council member Nowotny both stressed that the ECB doesn’t target the exchange rate, but officials continue to come out trying to calm tightening fears which picked up in the wake of last week’s minutes and underpinned recent EUR strength. Vice President Constancio confirmed that the guidance doesn’t have to be changed immediately and that any tweaking will be gradual and cautious. Hawk Weidmann, who already tried to calm concerns of a rate hike this year last week, suggested that expectations for a move in mid-2019 are in line with the ECB’s guidance. Clearly, the ECB is continuing to take the foot off the accelerator, but officials are eager to keep market expectations from running too far ahead and in the light of the reaction on forex markets to the minutes the doves will likely keep the upper hand this month.