From time to time it pays to take a step back from our markets, in order to recalibrate our perceptions. Apologies in advance for the mixed metaphors but occasionally; “taking a view from the hill”, being able to “see the woods from the trees”, is essential in order to “centre your being” as a trader and bring you “back down to earth”.
Perhaps we’ve all become so conditioned to accepting (as the norm) that our economies are: running on emergency rates, with tens of trillions of quantitative easing created and circa $50 trillion of new debt added to the global monetary banking system since the 2008 crises, that we fail to be surprised by any new announcements. We fail to regard them with any amount of hazard, moral or financial.
The ECB has committed an incredible volte face over recent years. From not having the power to introduce stimulus measures through QE, due to its restrictive mandate, it’s now (to use poker terms) on “full tilt” and gone “all in” to rescue: the banking system, the union and the European economy with endless rounds of QE, whilst taking emergency deposit rates into negative territory.
They’re not alone in what appears to be a Frankenstein creation of irresponsibility and throughout it all you can often find one sobering statistic that serves as an example of how precarious a situation global economies are in; a third of all government bonds have negative yields. Circa $15 trillion of global government debt offers negative returns…
The major news of the day on Thursday centred around the ECB’s decision to not cease its QE programme from April 2017, but instead continue it until December 2017. The ECB governing council will extend its asset purchase scheme (buying assets from banks with newly created money) for an extra nine months. There was only one dissenting voice apparently. German media are reporting that the head of the Bundesbank, Jens Weidmann, opposed Thursday’s escalation, which is why Mario Draghi (the ECB president) couldn’t describe the decision to extend QE as “unanimous”.
From April 2017 the ECB will buy €60bn of assets each month, down from €80bn. So it’s a taper (of sorts), but also an extension. The correct description is they’ve “steepened the yield curve”. Having created one trillion euros through QE by September 2016, the ECB is now committed to (roughly) doubling that amount up to December 2017, in fact the total commitment is €2.3 trillion and Mario Draghi stated that the policy should be considered “open ended”, as it still may not be enough to stimulate the European economy. Equity markets (in European markets) rallied on the news of the extra stimulus, whilst the euro sank.
Euro STOXX 50 closed up 1.39%, CAC up 0.87%, DAX up 1.75% (a yearly high), FTSE 100 closed up 0.42%, the Athens general index closed up 1.28%, Spain’s IBEX closed up 2.06% and Italy’s MIB finished the day up 1.64%. Buoyed by the European optimism and news that fewer Americans filed applications for unemployment benefits last week, thereby reinforcing the image of a healthy jobs market, caused the main USA markets to also rally; the SPX taking out another historic high, closing up 0.22% on the day, whilst the DJIA also posted a record high during the afternoon session and closed up 0.33%, at 19614. The rush and push for the DJIA to breach 20,000 before the year is out, appears to be insatiable. Federal Reserve officials will announce their decision on base interest rates on Dec. 14th. Futures traders are now pricing in a 100% chance that the rate will rise, compared with a 68% chance in early November.
WTI crude rose by 2.2% to reach circa $50.84 a barrel, with investors betting on the OPEC deal remaining intact, the price rose despite the recent surge in U.S.A. stockpiles. OPEC is inviting fourteen producers from outside the cartel to discuss further curbs at a meeting in Vienna on Saturday. Copper futures fell by circa 0.6 percent on Thursday, gold lost 0.3 percent.
The main currency trading action on Thursday centred on the euro versus all its peers, as it slumped by 1.3 percent to $1.0615, after earlier gaining as much as 1.1 percent. The wild gyrations of the euro currency pairs were caused by market participants trying to digest the initial impact of the ECB announcement. The eventual and obvious consensus reached (after spikes in both directions) was the euro had been devalued as a consequence of the extended, but tapered, QE programme. The yen dropped by 0.2 percent to 114 per dollar on Thursday. The Dollar Spot Index; the greenback versus its ten major peers, advanced by 0.5 percent, rising for the second time in four days.
Economic calendar events for Friday 09/12/2016, that could effect market sentiment
09:30. GBP. Total Trade Balance (OCT). At 9.30 London time the UK’s ONS publishes the UK’s trade balance. The monthly figure is expected to have fallen to £4.3bn, any figure not consistent with this prediction could cause sterling to experience volatility.
09:30. GBP. Construction Output s.a. (YoY) -0.1% prediction, currently 0.2%. Construction output in the UK is anticipated to have shrunk due to Brexit uncertainties. However, if the figure published is significantly worse than the contraction of -0.1% predicted, then naturally sterling could react negatively. Conversely a better figure could cause sterling to rise.
09:30. GBP. BoE/TNS Inflation Yearly projection (NOV) 2.2%. Currently the UK’s inflation figure is 0.9%, expectations on where the figure could be by the end of 2017, vary wildly. Perhaps the NIESR is the most pessimistic with a prediction of circa 3.7%. With sterling set to fall versus its peers, once the mechanism of Brexit begins, an inflation rise of between 2.2% – 3.7% could hurt the UK’s consumers.
15:00. USD. U. of Michigan Confidence (DEC). This is a survey of approx. 500 consumers which asks respondents to rate the relative level of current and future economic conditions. The expectation is for a rise in sentiment to 94.3 from 93.8.