Long-term Investing

3 ways to trade the 'Draghi Santa rally'

Analysts and economists were scrambling Friday to reassess their investment outlooks after the European Central Bank (ECB) signaled more stimulus could be on the way.

Many were expecting a fairly dull ECB meeting on Thursday but President Mario Draghi delivered yet again, talking up the idea of negative interest rates and leaving traders contemplating a major announcement in December.

A rally ensued in riskier assets and led the Dow Jones to surge 300 points by the session close. More of the same is now expected and CNBC highlights some of the biggest trades that analysts are getting excited about as we reach year-end.

Which stocks to buy

What will the ECB and Fed do next?

"With more QE (quantitative easing) from the ECB and possibly more from the Bank of Japan, yes, I think it could be a very happy Christmas and New Year," Tom Elliott, international investment strategist at DeVere Group, told CNBC Friday.

The lurch lower in the euro will be a welcome boost for euro zone equities and export-heavy stocks that have been battling against the appreciation in the single currency in recent months.

The best way to position for the upcoming ECB QE operation is to buy the Euro Stoxx index, according to Nick Nelson and Karen Olney, two analysts at UBS. The Swiss bank has noted in its research that investors should have a preference for the financial sector. Looking at historical data, it also said that cyclical sectors such as construction, retail and the semiconductor industry have usually outperformed in the event of a QE announcement.

"A further easing by the ECB is likely to favor euro zone countries. Our top picks are Spain, Italy and Portugal where we see the biggest potential for earnings to bounce back with profits circa 40-65 percent below their 2007 peak." analysts at the bank said.

How low can it go?

Don’t expect QE expansion in Dec: Bini Smaghi

The euro has crunched lower but foreign exchange analysts are pondering how low it can go if Draghi were to produce the goods in December.

Richard Yetsenda, head of global markets research at Australia & New Zealand Banking Group (ANZ), told CNBC Friday that parity with the dollar was "totally possible" in the coming months, alongside a rate hike by the U.S. Federal Reserve.

Meanwhile, the currency experts at BNP Paribas are expecting "short" positions to be rebuilt in the single currency with traders taking bets that it will fall against the dollar. The French bank stated Friday that it was looking at a target 1.09 for euro dollar, from Friday's level of 1.1108.

'Super-low' yields

ECB President Mario Draghi
Getty Images

With the ECB looking to buy more fixed income assets, short-dated yields should remain "super-low," according to Chris Scicluna, head of economic research at Daiwa Capital Markets Europe.

Getting more technical, the rates strategists at RBC Capital Markets recommend that German bond yield spreads will likely widen against the London Interbank Offered Rate - an average yield curve used by market participants. It's targeting a spread of around 50 basis points between the two.

Meanwhile, UBS analysts are focusing on euro-area credit , name checking iTraxx credit indices which track different segments of the debt markets.

A word of warning

But remember, the market might always be pricing itself in for a fall if the ECB fails to act in December.

Stephanie Lindeck, an economist at Julius Baer, said Friday that she was "skeptical of the notion that yesterday's message should set grounds for euphoria yet."