Photographer: Martin Leissl/Bloomberg

Charting the Markets: 'Super' Mario Draghi Swamps Everything

Managers are upbeat about the European economy (for now) and Italian yields move into negative territory.

Investors heard ECB President Mario Draghi signal the European Central Bank may expand stimulus this year, looked to the sky in anticipation of more helicopter money, sold the single currency and scooped up equities around the world. Asian stocks joined in the jubilation Friday that kicked off Thursday with the Shanghai Composite rising 1.3 percent. European stocks jumped again Friday morning - rising as much as 1.2 percent - after rising more than 2 percent on the back of Mr. Draghi’s comments Thursday. The MSCI All Country World Index rose to its longest streak of weakly gains since February.


The Markit PMI data was the most important statistical release of the week, and it came in ahead of expectations. The headline euro-area composite figure for PMI was 54, indicating managers think the economy picked up a tad from last month and expanded more than economists had thought. They were looking for it to come in at 53.4. But that headline number may bury the real lead. Dig a little deeper into Markit's report and there are signs of trouble to come with some forward-looking indicators pointing to a risk of a slowdown as concerns about growth and low prices persist. The expected deterioration seems to validate the response from Draghi Thursday. “Unless the PMI business activity and price indices pick up significantly in coming months, the combination of relatively weak growth and deflation signaled by the survey will fuel expectations that the ECB will step up its quantitative-easing program at the December meeting,” Chris Williamson, Markit’s chief economist, said in a statement.


The Euro held onto its Draghi-inflicted losses after sliding for close to 12 hours Thursday - briefly dipping below $1.11. That leaves the Euro on track for its worst week against the greenback since July. And the reaction to Draghi wasn't limited to the spot market. The options market indicates already bearish traders became even more bearish when Draghi started talking. Traders seem to see a pattern repeating from 2014 when the ECB President last said he was ready to easy policy. The Euro barely budged on the PMI report. Draghi swamps everything. Exporters that benefit from a weaker Euro - like Siemens, BMW and Volkswagen to name a few German companies - were among the best performers amongst equities.


The Italian government will be delighted with Mr. Draghi's decision. Yields on Italy's (and German) 2-year bonds are at record lows. Meanwhile, Draghi also succeeded in pushing the premium on 10-year Treasuries to an almost one-month high over German bunds. The gap in yields between the benchmark notes grew to as much as 1.55 percentage points on Thursday, the widest this month.

Ryan Chilcote is a presenter on Bloomberg TV. Follow him on Twitter @RyanChilcote