After an eventful weak last week when disappointment from the ECB sparked huge market volatility (especially in the FX market) while Yellen’s determination to raise US interest rates caused a sharp spike in bond yields. The OPEC meeting caused a further decline in oil prices with WTI currently trading below USD 40 per barrel.
US stocks staged a strong rally on Friday after the better than expected job numbers with all three US indicies rising more than 2% on the day and there was a sharp fall in the index volatility as measured by the VIX Index. Asian markets are higher and European Indices are bouncing back following the very sharp falls at the end of last week.
Oil has fallen again with WTI below as the OPEC meeting suggested the organisation was effectively abandoned its long-term strategy of limiting production and acting as a cartel. The organisation has given up in its battle against the US shale producers in the face of higher output from Russia and Iraq and most importantly Saudi Arabia. This suggests that there will be more downward pressures on oil prices in the short term. However, many shale producers are also likely to be under pressure at these prices too so further investment in that sector are unlikely. The OPEC meeting on Friday was described as contentious, lasting nearly seven hours (was only scheduled for four hours). Reports suggest that the conclusion was that even a cut of 5% was unlikely to push prices higher. The OPEC Secretary emphasizing that the cartel would pump at the ‘current production level’ – a sign production is likely the ceiling of 30mn barrels for now. This is bad news for oil producers but is good news for consumers and for global inflation. Weaker oil prices will add to the general pressures on commodities as measured by the Bloomberg Commodity Index which is testing 80.
ECB
The market was disappointed by the ECB action last week and Draghi’s recent comments had clearly led them to expect more. ECB only cut the deposit rate by 10bp (to -0.3%) rather than the 20bp cut that was expected. In addition, the monthly pace of asset purchases was kept unchanged at Euro 60bn compared with an increase to EUR 70bn to EUR 80bn that was expected. The Euro rallied sharply (as huge short positions were covered) and stocks and bonds fell sharply with huge moves being seen. Many analysts (who had been wrong footed by the currency moves) blamed the ECB and argued that its credibility had been destroyed.
Draghi responded in a speech on Friday in New York and said the measures announced by the ECB ‘was not a package meant to address market expectations’ and that ‘it was meant to address the reaching of our objectives’. Draghi called the measures a ‘recalibration’ and ‘not a novel monetary policy change’. This was designed to reassure the market that he was still a dove and willing to do whatever was required to fight deflation.
Bond Yields
France
In France, regional elections have seen the the National Front getting 28% of the overall votes and set to secure an unprecedented victory. They are leading in 6 out of the 12 mainland regions and have nearly tripled thoier share of the vote since the last elections in 2010. These results are in line with opinion polls and underline the progress that the anti-EU party has made in recent years. The second round of voting is due on the 13th of December. These results set them up for a strong position in the Presidential election in 2017. These results underline the falling support for the EU among Europe recession battered electorates where support for extremist parties had been rising and has been boosted in 2015 by the migrant crisis.
BIS Report
The latest Bank of International Settlements (BIS) quarterly report has again warned about financial fragility. The report highlighted that financial markets are showing an ‘uneasy calm’ at the moment ahead of a move by the Fed and that ‘there is a clear tension between the markets’ behaviour and underlying economic conditions’. The report cited risks for emerging markets in particular, highlighting that they would be able to ‘ride out’ the prospect of US monetary tightening in the short run but ‘less favourable financial market conditions, combined with a weaker macro outlook and increased sensitivity to US interest rates, heighten the risk of negative spillovers’.
US employment numbers and the Fed rate decision.
Friday’s November US payrolls were +211k and just a little ahead of expectations . The previous two month’s numbers were revised up by 35k Other data were in line with expectations. The unemployment rate held steady at 5%. Average hourly earnings rose +0.2% mom. This was a positive report and had nothing in it to suggest that the Fed will not raise interest rates next week for the first time in ten years.
ECB
ECB only cut the deposit rate by 10bp (to -0.3%) rather than the 20bp cut that was expected. In addition, the monthly pace of asset purchases was kept unchanged at Euro 60bn compared with an increase to EUR 70bn to EUR 80bn that was expected. This was all seen as less than had been promised. The Euro rallied sharply (as huge short positions were covered) and stocks and bonds fell sharply with huge moves being seen. Latter, on the USD fell as Yellen’s remarks to the Congress were seen as slightly more dovish than the previous day. The markets were confused and volatile.
European stock indicies fell 3% while the Euro rose 4% against the dollar, the largest one day move since 2009. Responding to the disappointing market reaction on Thursday afternoon, Draghi said that the measures announced by the ECB ‘was not a package meant to address market expectations’ and instead ‘it was meant to address the reaching of our objectives’. Draghi called the measures a ‘recalibration’ and ‘not a novel monetary policy change’. In comments which came across as far more dovish relative to Thursday and perhaps a sign of trying to repair a bit of the damage, the ECB President also made the point that ‘there cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate’. However, the Euro at 1.084 against the US dollar is currently is still about 3% higher than before Draghi spoke ( though it did hit a high of 1.098 on Friday as disappointment with Draghi’s comments led to frantic short covering).
Outlook
It’s a fairly quiet start to the week today, as is often the case after the non-Farm payrolls data. In Europe, German industrial production and Euro area investor confidence data are the only notable data releases. In the US, labour market conditions index and consumer credit data the only releases due.
European stockmarkets are trading sharply higher this morning and US stocks are currently expected to open flat later today.
