- European stock markets gained around 0.5%, supported by the ECB’s extension of its ultra-easy monetary policy. Spanish assets outperformed after Puigdemont seemed to backtrack from his Catalan independence claim, steering towards new elections (confirmation needed). US stock markets opened positive with NASDAQ lagging Dow & S&P.
- The ECB decided to extend its asset purchase programme from December 2017 to September 2018 while cutting monthly purchases in half, to €30 bn, from January onwards. Forward guidance still states the possibility to increase purchases during APP’s life span and the possibility to prolong duration past September. Policy rates remain unchanged.
- Sweden’s central bank has stuck to its dovish outlook in the face of rapid growth and more hawkish moves among its peers, resisting calls to end quantitative easing or bring forward plans for an interest rate rise and instead waiting to hear more information on the ECB’s tapering plans. They kept their policy rate unchanged at -0.5%.
- Norway’s central bank kept its benchmark interest rate at a record low to help support an economic rebound from the worst oil-industry crisis in a generation. The bank left the key deposit rate at 0.5%, without giving updates on its forecasts since it’s a so-called interim meeting.
- EMU lending growth to businesses, a key plank in euro zone’s recovery, rose to 2.5% in September from 2.4% in August while household lending was steady at 2.7%. The annual growth rate of the M3 measure of money supply, a precursor of economic activity, rose to 5.1% last month from 5%, beating expectations.
- Catalan President Carlos Puigdemont may call regional elections this week, rather than declaring independence from Spain, as authorities in Madrid finalize plans to oust his rebel administration, according to two people familiar with his thinking.
- US eco data printed very close to expectations. Weekly jobless claims bounced slightly from multi-decade lows, from 223k to 233k. The September trade deficit widened from $63.3 bn to $64.1 bn.
Rates
Dovish ECB supports Bund, but no start of new rally
The ECB didn’t surprise with its APP decisions and delivered a very dovish outcome. They buy sufficient time to prepare the final turn in the normalization process: ending APP in 2018 and probably hiking rates in 2019.
-) The APP purchase programme will be prolonged by 9 months to the end of September 2018 at least, but can be prolonged if necessary.
-) The monthly amount of net purchases will be halved to €30B starting Jan. 18.
-) The forward guidance regarding the APP remains in place: the APP can be increased in size and/or duration if the outlook becomes less favourable or if financial conditions becomes inconsistent with further progress towards a sustained adjustment in the path of inflation. The decision to keep the program open ended was not unanimous (a large majority)
-) Forward guidance on interest rates remains unchanged: Rates will remain unchanged at their present level for an extended period of time and well past the horizon of the net asset purchases.
-) re-investment proceeds of maturing assets well beyond end net asset purchases
The German Bund gained ground after the decisions and outperformed a sideways moving US Note future. Bund gains remain modest though as consensus had been building over the past weeks about today’s outcome. We don’t expect today’s decision to be the start of a new Bund rally higher. At the time of writing, German yields decline by 2.3 bps (2-yr) to 4.7 bps (10-yr). Changes on the US yield curve range between -0.2 bps (30-yr) and -0.8 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Greece underperforming (+5 bps) and Spain (see headlines) & Italy (approval new election law) outperforming (-5 bps).
The significance of the actual decisions marginalized ECB President Draghi’s press conference afterwards. President Draghi stressed the importance of very favourable financial conditions necessary for inflation to return to target. Moderate upticks in underlying inflation warrant a recalibration to €30 bn starting next year, but core CPI still has to show a convincing upward trend. Headline CPI is expected to edge lower into year-end. Risks to the economic outlook are broadly balanced with sentiment indicators suggesting continued growth momentum. Draghi referred to the euro once by saying that FX developments cause one of the downside risks to growth. It’s the first time that used such specific comments on the single currency.
Currencies
‘Soft’ ECB decision triggers modest euro setback
Today, the extension in duration and reduction of the size of the ECB’s APP programme was on the soft side of market expectations, supported with the safe-guarding of the forward guidance on APP and rates. EUR/USD dropped from the 1.18+ area and trades currently around 1.1760. So, The ECB decision was unable to push EUR/USD out of the established trading range.
Overnight, Asian investors awaited the ECB policy decision. EUR/USD traded with a slightly positive bias in the low 1.18 area. The dollar also lost a few ticks against the yen and traded in the mid 113.50 area. (USD at 113.45).
EUR/USD touched an intraday top in the 1.1835/40 area just before the open of the European markets. During the morning session European yields trended cautiously lower and so did the euro. Interest rate differentials also evolved slightly in favour of the dollar. Around noon there were also plenty of rumours/headlines on Catalonia president Puigdemont calling snap elections. However, there is still a lot of uncertainty/chaos on the issue. Spanish equities jumped higher on the news, but there was no direct impact on the euro. EUR/USD traded just north of 1.18 going into the ECB policy announcement.
The ECB acted more or less in line with the consensus. It prolonged the APP to September next year, but halved the amount of monthly purchases from € 30 bln to €60 bln. The forward guidance on APP and on interest rates remained unchanged. This scenario could be considered as dovish. Regarding FX, the ECB president mentioned foreign exchange developments as a risk factor to inflation. European yields declined a few bps and EUR/USD dropped to the 1.1740 area. However, the sell-off already petered out during the press conference. EUR/USD trades currently in the 1.1750 area. USD/JPY showed no clear trend and hovered in the upper halve of the 113 big figure. Potentially unexpected developments in Spain are still a wildcard for trading later on today.
Conclusion: the soft ECB approach blocked the upside of the euro. However, the down-move remains very modest and keeps EUR/USD in its tight established range.
Brexit uncertainty prevents further sterling comeback
Sterling came gradually under pressure against the euro and the dollar as the positive impact from yesterday’s better than expected UK Q3 GDP faded. There were again plenty of divergent views reported on how to address Brexit negotiations within the UK conservative party. This was a sterling negative. EUR/GBP tried to regain the 0.8950 area, but the gains could not be sustained. At noon, the CBI retail sales gauge dropped from +42 to -36, the lowest level since 2009. However, the (volatile) report had again only limited impact on sterling. During the afternoon, sterling continued to trade with a negative bias against (a broadly stronger) dollar. Cable trades currently in the 1.32 area. EUR/GBP declined in line with the overall performance after the ECB policy announcement. EUR/GBP returned to the 0.8900 area.
