Markets
Yesterday’s policy meeting delivered the preannounced recalibration to address the impact of new wave op the pandemic on the economy. The market reaction suggests that decision was rather close to expectations. The ECB communication signaled that it is focusing on the preservation of current loose monetary conditions rather than on further easing. They could have gone (a bit) further. The Bank raised the envelop of the Pandemic Emergence Programme (PEPP) by € 500 bln to 1.85 tn. Net purchases will continue at least until March 2022, instead of June 2021. Some markets participants had anticipated a prolongation of one year. The ECB will continue to reinvest the maturing PEPP bonds at least till the end of 2023. Net asset purchases under the APP will continue at €20 bn/month. The ECB will conduct three additional TLTRO III operations (last one December 2021) and extended the period over which considerably more favourable funding terms will be applied. Due to the new wave of the pandemic, the ECB downwardly revised next year’s growth forecast to 3.9%, but solid growth is expected for 2022 (4.2%). Inflation is expected to remain well below the 2% target trough 2023 (1.4% in 2023).The ECB will carefully monitor the valuation of the euro with respect to reaching its inflation target. However, the tone of the quotes on the euro wasn’t really one of an outright verbal intervention.The reaction of European bond markets can be labeled as some kind of buy the rumor sell-the-fact reaction. Bunds rallied ahead of the decision, but (more than) returned the initialgains. Maybe markets had hoped for some more. Or did they adapt positions as the current easing might be the endof the current cycle? Whatever, in the end, German yields changed less than 1 bp in a daily perspective. Intra-EMU, spreads mostly narrowed marginally. On broader markets outside Europe, the US yield curve again showed quite a big bull flattening with yields declining between 1.2 bp (2-y) and 5.7 bp (30-y). The long end was supported by a very successful 30-y auction. An unexpected sharp rise in US jobless claims and an ongoing stalemate in the negotiations for a new US fiscal package also caused some investor caution, with limited losses of the Dow and S&P. On the FX market, EUR/USD rallied after the ECB policy announcement. Looking at other cross rates, the move was probably a combination of both post-ECB euro strength and USD softness. The pair closed at 1.2138. Sterling declined during the day (against the euro) as prospects for a Brexit deal looked ever more difficult (EUR/GBP close at 0.9130).
This morning, Asian markets are trading mixed to cautiously higher. Commodity related assets remain in focus. The rally in iron ore accelerates and Brent oil regained the $50 p/b level. AUD/USD (0.7565) is trading at the strongest level since mid-2018. Futures suggest a mixed to slightly lower open in Europe and the US.
Some investor caution going into the weekend is likely with political event risk (US fiscal aid/Brexit) still high on the agenda. Brexit of late wasn’t that important for global trading but remains a major source of uncertainty for European and UK markets. In this respect, it might also affect the post-ECB repositioning on the European bond market. As long this topic isn’t solved, safe haven German Bunds might remain bid, with the 10-y holding near recent lows (-0.60% area), even as the ECB meeting might have marked the final step in the easing cycle. Brexit uncertainty was also seldom a major driver for EUR/USD. The trend remains north, but maybe this isn’t the right time for the pair start a new upleg now. EUR/GBP is nearing intermediate resistance 0.9150. A break would signal more troubles for sterling.
News Headlines
EU leaders rubberstamped the European budget with the €750bn included pandemic recovery fund yesterday. Hungary and Poland withdraw their veto threat over the rule of law mechanism after accepting Germany’s compromise that offered reassurances over how these conditions would be applied.
The Bank of England eased its ban on paying out dividends by UK banks,a move regulators deemed necessary to preserve capital to cover losses that might arise from the pandemic. The decision is in stark contrast with the EU, where regulators are mulling to extend the current ban well into next year, though with some exceptions.
