Equity markets remain buoyed on Wednesday ahead of the ECB's rate announcement later on Thursday. The market's initial reaction will depend a lot on what measures are announced by the ECB. Equity and bond investors anticipate the ECB will announce the purchase of asset-backed securities with the rate announcement; the question will be if the ECB announce additional measures. This could include buying other types of securities, possibly incorporating corporate bonds. Should broader measures be introduced, one suspects it will give risk assets another lift, at least in the short term.
There has been plenty of rumour and speculation as to what the ECB might do and one could argue asset prices have discounted, to some degree, action from the ECB. One old stock market adage, 'buy on the rumour, sell on the fact', so there may be some room for profit taking later on Thursday. If no new measures are announced a small knee jerk reaction of disappointment could be expected and focus will then be on Mario Draghi's press conference comments. One would also imagine if no new measures are announced speculation will increase the sledgehammer approach will come in October.
Many mixed messages were coming out on Wednesday from Russia and the Ukraine relating to a peace agreement. Any moves towards a peace settlement will be good news, but should it be confirmed one would expect the impact on asset prices to be limited. Equities in particular have tended so far to shrug off the wider implications of the conflict, after the initial shock, and so any peace agreement should have a limited impact.
What is surprising is the lack of bearing an upturn the Scottish yes campaign appears to be having on equity market sentiment particularly when put alongside the apparent rising fortunes of the UKIP party. A yes Scottish vote we discussed a week or so ago would have implications for both countries, and equity markets never react well to uncertainty. The rising star that is the UKIP party could once again highlight the divisions within the conservative party over Europe. With a general election on the horizon anything that could boost the labour party, with the broadly held view that many of their policies are not business friendly, does have the potential to impact bond and equity market sentiment.