Sentiments Weighed Down By Dovish FOMC, ECB Rate Cut Awaited

Sentiments were somewhat weighed down by the dovish FOMC statement, as DOW dropped -138.85 pts while S&P 500 dropped -14.87 pts. Asian equities also followed by opening lower and stay soft. The development in U.S. equities suggests that recent consolidation is still in progress and is probably extending with another down leg. DOW faced some selling pressure ahead of April's high of 14887. While S&P 500 edged to record high earlier this week, it also faced some pressure ahead of 1600 psychological level. Focus will be on whether the U.S. NFP from Friday would trigger deeper pull back in stocks and pressure commodity currencies. But before that, focus will be on today’s ECB rate decision.

As widely expected, the Fed left its policy stance unchanged with asset purchases of 85B maintained. Yet the policy statement was increasingly dovish, with policymakers indicating that further easing would be adopted should the economic recovery stall. The central bank acknowledged economic growth at a moderate pace but admitted slowdown in inflation and was less enthusiastic on the job market. It also raised concerns that the negative effects to be imposed by fiscal tightening. The May statement said that 'the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes', signaling the Fed would still continue further easing if the momentum of economic recovery reduces. There has been increasing conviction that the ECB would announce a cut in interest rates at its Thursday meeting. While the German PMI and IFO have disappointed and the French business climate indicator had shown initial signs of vulnerability of the bloc's economic developments, moderate inflation and the rise in jobless rate released yesterday have reinforced easing bias. On the rate cut, the deposit rate, currently at zero, is expected to stay unchanged. More in ECB To Cut Policy Rate To 0.5%.

In the U.K., the National Institute of Economic and Social Research raised the 2013 economic projection to 0.9% growth, up from the 0.7% forecast in February. Growth projections for 2014 and 2015 are 1.5% and 2.1% respectively, unchanged from prior projections. NIESR said that the "the growth rates we're talking about are nowhere near what you'd describe as recovery." It urged the government to boost capital spending with a package of around 2% of GDP to help recovery.

On the data front, the Aussie was pressured as building approvals dropped sharply by -5.5% mom in March, far below expectation of 1.3% mom rise. The Australian import price index was flat qoq in Q1 versus expectation of -0.5% qoq. In China, the HSBC manufacturing PMI dropped to 50.4 in April. Swiss SVME PMI, Eurozone PMI manufacturing final and UK PMI construction will be released in the European session. Canadian trade balance, U.S. trade balance, non-farm productivity and jobless claims will be released in the U.S. session.