Euro Bears Looking to Sell on Rallies

Friday December 9: Five things the markets are talking about

An expansive monetary policy buys time for reforms, but too much stimulus creates an unstable financial market.

The ECB’s decision to reduce their monthly bond-buying rate as of April next year sends the market the correct message, especially after the disappointing result of last weekend’s Italian referendum.

By reducing and extending, the ECB is giving itself the latitude to even increase QE again if inflation turned out to be lower than forecast next year. The prospect of tapered monthly purchases and lower-for-longer negative yields means that the ECB’s “reflation” channels have definitely moved in favour of a weaker EUR and higher equity markets.

1. Stocks trade atop of record highs

Global equities are set to close out this week near their 16-month highs, again supported by an extended monetary policy push by the ECB.

The MSCI World index is up +0.1%, on track for a gain of +2.7% this week. In Asia, Japan’s Nikkei closed up +1.2%, aided by a weaker yen (¥114.52); Australia’s ASX 200 gained +0.3% and Taiwan’s Taiex was up +0.2%. The outlier, Korea’s Kospi closed down -0.3% ahead of lawmakers’ vote to impeach their President.

In Europe, equity indices are trading mixed. Banking stocks are weighing the Eurostoxx down while the energy and commodity sector is providing some support for the FTSE 100.

U.S futures are trading little changed ahead of the open stateside.

Indices: Stoxx50 -0.3% at 3,179, FTSE flat at 6,934, DAX -0.3% at 11,149, CAC-40 flat at 4,738, IBEX-35 -0.5% at 9,099, FTSE MIB -1.2% at 18,213, SMI +0.6% at 8,001, S&P 500 Futures -0.1%

2. Crude finds support, gold lower

Oil prices have found support overnight on optimism that non-OPEC producers would agree to cut output following OPEC’s agreement to limit production next year.

Both set of members are to meet this weekend in Vienna. The aim is to seek non-member help to curb a global glut.

Russia has said it would cut -300k bpd, meaning other non-OPEC producers combined would need to pledge the same amount to lower output by the -600k bpd that OPEC seeks.

Azerbaijan is coming armed with its own proposals for its own reduction, while Kazakhstan is to offer to freeze output at last month’s levels.

Brent crude Feb futures are trading up +12c at +$54.01 a barrel, after rising +1.7% yesterday, while Jan WTI futures are up +32 cents at +$51.16 a barrel. Both contracts have lost -1% this week.

The main reason why crude prices continue to underperform this week is that the market is still uncertain whether non-member cuts would reach the psychological -600k bpd benchmark.

Spot gold prices are under pressure for a second consecutive session, declining -0.2% overnight to +$1,168.24 an ounce. The precious metal is heading for the worst run of weekly losses in 12-months.

3. ECB prolongs stimulus, which pressures bonds

Euro sovereign bond prices have come under renewed pressure after the ECB signalled it would start scaling down its bond buying in 2017. This selling pressure has trickled into the U.S market.

Ahead of the open, U.S 10-year notes are trading at +2.422%, while the yield on the 10-year German bund has backed up +0.07bps to +0.418%. The 10-year yield in Portugal, which posted the biggest drop midweek in global bond markets, has rallied +0.2bps.

Elsewhere, New Zealand 10-year debt led losses in Asia, with yields rising +10bps to +3.29%, while Aussie yields on similar maturities climbed +8bps to +2.82%.

Note: The ECB’s announcement yesterday should steepen the curve. Why? The ECB has altered its program so that it can buy bonds down to one year, reducing the previous lower bound of two-years.

4. Euro bears looking to sell on rallies

Despite the ECB presenting a ‘dovish’ and ‘hawkish’ policy decision yesterday, Euro policy makers are sending a balanced message to the market.

They have shifted the markets focus to next weeks Fed rate decision that is expected to see a stronger dollar theme supported by rate differentials.

Currently, the ‘big’ dollar remains firm across the board (€1.0615, ¥114.65, £1.2606), supported by fixed income pricing in a +100% probability that the Fed would hike on Dec 14.

Yesterday, after the ECB announcement the single unit recorded its biggest daily loss outright since the Brexit vote (June 23). However, it was unable to register a new weekly or financial market crisis low. Expect the Euro to face further headwinds on doubts over any pickup in Euro inflation and growth. The “bears” feel comfortable selling the currency on any rallies.

5. U.K Trade data improves

U.K date released this morning showed that the trade deficit narrowed in October, with exports hitting a record monthly high.

The deficit in goods traded narrowed to -£9.7B from a revised -£13.8B in September. The market was expecting a deficit of -£12B.

The ONS stated that there is “limited evidence so far” that exports are benefiting from a sharp fall in the pound since the Brexit vote (GBP has fall-15% sine June 23).

Including services, the deficit narrowed -£2B, supported by a jump in exports, with exports of goods and services reaching a monthly record of +£46.4B in October.

Goods exports to non-EU countries hit a new high of +£14.4B, while to the EU rose to +£12.4B.

Note: Monthly trade data can be erratic.

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