- ECB seems extremely hesitant to green-light the use of additional easing, clearly highlighting the growing disenchantment in the monetary policy strategy. This will become a key investment theme of 2017.
- ECB's dovish view still prevails and the tapering of the QE program does not seem even close
- We maintain our view that QE will be extended and that the amount purchases of €80 billion a month should remain unchanged for some time
- The ECB's December meeting will be the key meeting of this year
- In terms of interest rates, we hold our dovish view even though we believe that there are little room for other rate cuts although rates cannot go much deeper into negative territory or the risk of triggering a bank run will increase
Risk appetite was weak in the Asian session following ECB not indicating that a QE extension is on the table and Fed Dudley's commented that a rate hike remains appropriate. Asia’s regional equity indices were broadly lower following Wall Street lower. USD gains against G10 and regional currencies. The Nikkei fell -0.30% and Shanghai Composite increased a meagre 0.07%. Hang Seng was closed for a local holiday. Crude futures fell on profit taking yet held above the $50 handle. The World Bank raised its crude forecast price for 2017 to $55 brl from $53 brl and indicated that non-OPEC production would keep a cap on prices.
Financial markets continue to digest the results of the ECB meeting yesterday. Draghi deferred any decision until the December's meeting (as we had expected). In our view, the bank seems extremely hesitant to green light the use of additional easing unless it is the only option. This clearly indicates a growing disenchantment in the monetary policy strategy. This will become a key investment theme of 2017. The back and forth in stock prices indicates that markets are also struggling with global central banks next steps. Our interpretation of Draghi's remarks yesterday is that the ECB will extend the asset purchased program in December, while announcing the technical relaxation of parameters of QE to manage the scarcity issues.
Yann Quelenn, market analyst: "After yesterday’s ECB meeting, investors were expecting Mario Draghi to announce any extensions about the QE beyond March 2017. No clear views were offered yesterday by Draghi but he hinted at the extension of bond purchases. The dovish view still prevails and the tapering of the QE program does not seem even close. We maintain our view that QE will be extended and the amount purchases of €80 billion a month should remain unchanged for some time.
It appears very clear to us that the ECB December meeting will be the key meeting of this year. In order not to bring any further turmoil to the market, we believe that policymakers chose to opt this month for the status quo. It is also worth noting that Draghi is probably satisfied with the EURUSD level which is now stalling below 1.10. This largely benefits Eurozone exporters and is bringing some relief to ECB officials.
Eurozone inflation rate remains very low at 0.4% and also well below the inflation target of 2%. It cannot be said that the ECB program has been efficient so far. Indeed, no one can say that the Eurozone economy has been stimulated knowing that growth remains somewhat sluggish. In terms of interest rates, we hold our dovish view even though we believe that there is little room for other rate cuts. From our vantage point, rates cannot go much deeper into negative territory or the risk of triggering a bank run will increase. There is no upside to the ECB to add some pressures on the banking sector, which is already at stake. Some major banks such as Deutsche Bank or Commerzbank are making the headlines and this would only increase their difficulties.” ---
In geopolitical news, the President of the Philippines, Duterte announced a “separation” with the USA, while shifting alliance towards China. The new President's relations with the US have been strained but this is an extreme pivot, possibly changing the delicate balance in the pacific.
US yields continue to rally with yield differential further skewed in the USD favor. The strong US data supports the demand for yields especially in the longer end of the curve. Philadelphia Fed Business outlook rose 9.7 vs. 5.0 exp, while existing homes sales increased 3.2% vs. 0.4% exp. Heading into the US election and expectations for December rate hike firming we should see USD remain in demand.
In China, house prices indicated further acceleration in September. New home prices rose 11.2% y/y from 9.2% in August. Of the 70 cites polled 64 indicated price increased. The rapid price increase has fueled concerns of an asset bubble in China. Officials have taken steps to reign in the property markets yet efforts have not spilt over into the data. PBoC continues their gradual CNY deprecation as USDCNY hit a new cyclical low at 6.75.
On the docket today, traders will be eyeing Canadian data including retail sales and inflation report. According to the BoC, with the risk roughly balanced, this read will influence expectations for additional easing.