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 Thursday 08 December 2016

All eyes on ECB - AM Briefing



Early moves

ECB meeting in focus

Analysts expect extension to bond purchase programme

The European Central Bank (ECB) meets today and is widely expected to announce an extension to its quantitative easing program. Most analysts expect the bond purchase programme to be extended by another six months to September 2017. But some analysts believe that the size of the monthly asset purchases could be scaled back from their current €80 billion per month level after the current March 2017 end-date. There’s also some speculation that the ECB may signal a formal end-date to the asset-purchase programme.

ECB President Mario Draghi has warned of the risks of prolonged low interest rates and he has persistently called on Euro zone governments to come up with fiscal stimulus. And earlier this week former Bundesbank head Axel Weber said that the ECB could halt its bond purchase programme sooner than the market expects, and then start hiking rates by September next year. If the ECB gives any such hint today then we can expect a sharp rally in the euro.

Stock Index Update

Investors rush to get involved in “year-end rally”

Further stimulus seen lifting equities

Global stock indices stormed higher yesterday and are firmer again this morning. Partly this is due to traders wanting to get involved in a much-hyped “Christmas rally” but also it’s on hopes of further stimulus. This may sound a bit bizarre given that we’re probably just a week away from a US Federal Reserve rate hike. However, bear in mind that investors firmly believe that monetary tightening will: be offset by US tax cuts and fiscal stimulus; comes as a result of rising inflation expectations; is in response to a favourable outlook for economic growth. Not only that, but the European Central Bank is expected to announce that it will extend its €80 billion per month bond purchase programme later today.

The other factor lifting stocks ironically is Sunday’s Italian referendum result. This brought defeat for Prime Minister Matteo Renzi. However, this is seen as boosting the prospects of a state rescue for the troubled Banca Monte dei Paschi. It seems possible that Italy’s third largest bank will now be nationalised. This would protect retail bond holders as the government would buy up their bonds at par and convert the debt into equity. This will require some EU fudging to circumvent rules regarding government banking rescues, but that’s hardly the biggest obstacle in sight. The thinking goes that because Deutsche Bank remains in dire straits, there will be little German opposition to a loosening of the rules in Italy’s favour. After all, the German government may soon have to step in to rescue one of the world’s most systemically important and risky financial institutions.

Commodities Update

Crude oil slips further

Precious metals finally find support

Crude oil slipped again yesterday. Brent and WTI both lost ground for a third consecutive session after hitting their best intra-day levels since July 2015 on Monday. Yesterday’s sell-off came despite bigger-than-anticipated drawdowns in US crude inventories. After Tuesday’s close the American Petroleum Institute reported a decline in stockpiles of 2.2 million barrels on expectations of a 1.37 million barrel decline. Then yesterday afternoon the US Department of Energy confirmed the drawdown when its own calculations showed a 2.4 million barrel decline on expectations of a fall of 1.4 million barrels. Despite this, crude prices continued to head lower as there were significant builds in both gasoline and distillates. Chart-wise, there’s still plenty of resistance for WTI around $52. Investors have become less convinced that last week’s commitments by most of the world’s major producers to cut production will have much effect on either inventories or prices. Earlier in the week it was reported that OPEC production hit a fresh record high in November of 34.19 million barrels per day. On top of this Russian output hit a post-Soviet record of 11.12 million bpd in November. This suggests that OPEC’s commitment to cut production by 1.2 million bpd, along with Russia’s promise to gradually reduce output by 300,000 bpd won’t make much of a dent in existing inventories.

There was some better news yesterday for owners of precious metals. Both gold and silver managed to post decent gains as the dollar continued to pull back from recent highs. It’s still early days but gold appears to have found some mild support around the $1,160 area. However, it really needs to consolidate around $1,180 to help restore investor confidence. This is slightly above the 61.8% Fibonacci Retracement of the December 2015 to July 2016 rally. The chart for silver looks far more constructive. There’s an obvious and strong support level around $16. However, silver has managed to consolidate above here since the last week of November and this helped to provide a base for yesterday’s strong rally. It’s possible that the worst could now be over for the two precious metals. However, much depends on how the dollar moves from here. If the greenback bounces back from here then we can expect gold and silver to resume their declines. Consequently, today’s ECB meeting will be watched closely.

Forex Update

GBP slides after release of weak data

Dollar Index steady above 100.00

Sterling came under pressure early yesterday. This followed the release of a couple of disappointing data releases. Most importantly, Manufacturing Production fell 0.9% in the month of October. This was sharply below last month’s reading of +0.6% and the consensus expectation of a 0.2% month-on-month increase. But there was also bad news on Industrial Production. This slumped by 1.3% in October to post its largest month-on-month fall in over four years. This missed the expected reading of +0.2% by a long shot, and was well below the -0.4% recorded in the previous month. The news saw the GBPUSD pull back to test support around 1.2600. A break below here would open up the possibility of a retreat towards 1.2400.

Later in the day the US dollar also came under some selling pressure. Traders decided to reduce their exposure and book some long side profits ahead of today’s ECB meeting. Earlier in the day the USDJPY bounced to 114.20. This followed comments from Bank of Japan (BOJ) Deputy Governor Kikuo Iwata who said that the BOJ was still committed to using both rate cuts and asset purchases as key tools to revive the economy.

Upcoming events

Today’s key economic event is the European Central Bank’s (ECB) last monetary policy meeting of 2016. The rate decision is released at 12:45 GMT and ECB President Mario Draghi will hold a press conference at 13:30 GMT. We also have Weekly Jobless Claims from the US.


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Posted by David Morrison

Category: AM Bulletin

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