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30 Sep 2016
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29 Sep 2016
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27 Sep 2016
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26 Sep 2016
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26 Sep 2016
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23 Sep 2016
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22 Sep 2016
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22 Sep 2016
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21 Sep 2016
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21 Sep 2016
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20 Sep 2016
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20 Sep 2016
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19 Sep 2016
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19 Sep 2016
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16 Sep 2016
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16 Sep 2016
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15 Sep 2016
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15 Sep 2016
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14 Sep 2016
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14 Sep 2016
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13 Sep 2016
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13 Sep 2016
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12 Sep 2016
Comparing major Central Banks
09 Sep 2016
AM Bulletin: ECB disappoints
09 Sep 2016
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08 Sep 2016
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07 Sep 2016
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06 Sep 2016
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05 Sep 2016
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02 Sep 2016
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 Friday 09 September 2016

AM Bulletin: ECB disappoints



Indices Update

European equities and US stock index futures were lower first thing on Friday. It seems there’s some disappointment creeping in following yesterday’s ECB meeting while oil prices have pulled back from their best levels. Overnight China’s CPI came in at +1.3% year-on-year. This was well below the 1.7% expected and the prior reading of +1.8%. This is bad news for the People’s Bank of China which has a 3% inflation target. The weak number suggests that China could soon be increasing its own monetary stimulus package.

Yesterday the European Central Bank’s (ECB) Governing Council held off from easing monetary policy further. It kept its three key interest rates unchanged and maintained its Asset Purchase Programme (APP) at €80 billion per month. It said that this would continue until March 2017, but could be extended if necessary. It tinkered around with its projections for GDP and inflation, and lowered its EURUSD price forecast for 2016, 2017 and 2018.

Ahead of the meeting a poll of analysts had shown that no one had expected the ECB to cut any of its interest rates.  However, some had forecast that the central bank would extend the duration or size of its APP. The trouble is that the APP is effectively open-ended on duration as it stands, so the only other mainstream action the ECB could have done is increase the size of its monthly bond purchases. However, that would have meant the ECB would have to expand the universe of eligible bonds either by changing the rules so it could buy bonds yielding less than the deposit rate or below two years' maturity. When it came to it the governing council opted to keep its powder dry for this meeting in a move that investors viewed as disappointing. Equity markets sold off while the euro rallied.

However, the major stock indices pared their losses as crude oil surged for a second consecutive session. This followed the latest US inventory update from the Energy Information Administration which confirmed Wednesday’s report of a huge drawdown in crude stockpiles.

In other news, Chinese trade data for August showed an unexpected jump in imports which rose for the first time in nearly two years. Exports fell again, but less than expected and this brought China’s trade surplus to a seven-month high in yuan terms.

The FTSE 100 ended the day 12.1 points higher at 6,858.7

The German DAX fell 77.7 points or 0.7% to end the day at 10,675.3

The US30 closed down 46.2 points to finish at 18,479.9. The S&P 500 fell 0.2% to close at 2,181.3 while the Nasdaq 100 lost 0.6% to close at 4,804


Shares in Micro Focus (MCRO) surged 21% on yesterday morning to hit a record high and making it the biggest riser on the FTSE 100. The move came following news that the company will take over the non-core software assets of Hewlett Packard Enterprise (HPE) in a deal worth $8.8 billion. This will be one of the largest takeover deals by a British company in recent years. Micro Focus said the deal would significantly increase the scale of the company with the new business having annual revenues in the region of $4.5 billion. Micro Focus ended the day 14.7% higher at 2,243 pence.

Commodities Update

Brent and WTI were both sharply higher in early trade yesterday. The move followed the release of the latest update on US inventories from the American Petroleum Institute (API). The data showed a crude drawdown of 12.1 million barrels last week. The market had expected a build of 200,000. There was also a very large drawdown in gasoline stocks.

Later on yesterday the Energy Information Administration (EIA) released its own inventory data for the week ended 2nd August. This confirmed the API’s unexpectedly large drawdown, and an even bigger decline in stockpiles. The EIA data showed a fall of 14.5 million barrels on expectations of a 600,000 build.

It seems likely that the decline in stockpiles is related to last month’s partial shutdown of production in the Gulf of Mexico. This came as Tropical Storm Hermine approached the area. But it is somewhat surprising that the market hadn’t priced this in. We’ll have to wait until next week to see if this drawdown gets reversed.

Looking at the charts, WTI and Brent are both up around 9% since the beginning of the month. Technically, both have bounced off the 61.8% Fibonacci Retracement of the rally in the first few weeks of August. Now the upside targets are the August highs - $51.20 for front-month Brent and $49.30 for WTI. A failure to take out these levels could see the oil price reverse sharply.

Gold and silver were firmer in early trade yesterday. Both metals got a lift from initial dollar weakness which was sharply lower thanks to euro strength. Investors bought the single currency ahead of the ECB meeting. The euro rallied further after the central bank announced that it was keeping monetary policy on hold this month. ECB President Mario Draghi said that the Governing Council had made a modest downgrade to the central bank’s growth forecasts and warned of downside risks, including uncertainty relating to Britain's decision to exit the European Union. However, he said no action was required for now.

The euro gave back much of its early gains and this weighed on the two precious metals. Gold and silver tend to fare well in a low US interest rate environment. This is because the lost-opportunity cost of holding non-yielding assets is reduced when interest rates are low or falling.

Forex Update

The euro rallied sharply ahead of the ECB rate decision as investors dialled back their expectations for further monetary easing. They were right to do so as the ECB held back from cutting any of its key interest rates further. The ECB also fell short of market expectations by not announcing an extension of the asset purchase programme beyond March 2017. The ECB reiterated its previous comments that “QE will run through March 2017 or beyond if needed” leaving the door open for an extension at a later date. Finally, the central bank kept its bond purchase programme unchanged at €80 billion per month.

The ECB said it saw no reason to change policy as not much had changed with respect to either the economic or inflation backdrop that is different from the ECB’s baseline scenario. This was reflected in the ECB’s staff forecasts which were little-changed from the prior meeting.  The central bank lowered its EURUSD price forecast to 1.1100 for 2016, 2017 and 2018 from 1.1300, 1.1400 and 1.1400 respectively.

In other news, back on Wednesday Richmond Fed President Jeffrey Lacker said that it looked as if the case for a September rate increase was growing, thanks to a strong US labour market. Kansas City Fed President Esther George (and FOMC-voter) also said she believes the US labour market is at or near full strength. No doubt we’ll hear many more regional Federal Reserve regional presidents give a bullish update on the US economy over the next week or so. However, we shouldn’t expect them to follow through with a September rate hike.

Upcoming events

Today’s significant economic events include UK Goods Trade Balance, Construction Output and Consumer Inflation Expectations. We also have Eurogroup meetings and US Wholesale Inventories.


Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.


Posted by David Morrison

Category: AM Bulletin

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