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 Thursday 08 September 2016

AM Bulletin: ECB rate decision in focus

 

 

Indices Update

The Governing Council of the European Central Bank (ECB) holds a monetary policy meeting in Frankfurt today. This will be followed by a press conference from ECB President Mario Draghi. The central bank has to decide whether to ease monetary policy further now or hold off until later in the year. This is a tricky decision as recent economic data releases continue to show weakness across the single currency bloc. However, the ECB will be wary of taking additional measures which may continue to be ineffective and therefore counterproductive.

According to Eurostat, the Euro zone’s August core CPI (which excludes food, energy, alcohol and tobacco) came in at just +0.8% annualised. This was down from the prior month’s reading of +0.9% and continues to run well below the ECB’s 2% preferred inflation target. Headline inflation (which includes all volatile components) rose just 0.2% in August when compared to the same period last year. Meanwhile, earlier this week it was confirmed that the Eurozone’s second quarter growth rate was a disappointing 0.3% when compared to the first three months of 2016. Growth in the single currency zone remains tepid while inflation is subdued.

So, economically the Euro zone is not in good shape. In addition, there are fears that the UK’s vote to leave the EU has also knocked confidence in the single currency zone. All this has led a number of analysts to predict that the ECB will ease monetary policy further at today’s meeting. Further stimulus could take the form of a Deposit Rate cut of 10 bps– taking the interest charged on funds lodged with the ECB by Euro zone financial institutions to minus 0.50% Also, there’s some talk the ECB may extend both the size and duration of its current bond buying programme. This stands at €80 billion per month and is set to end in 6 months’ time.

Bear in mind, when the programme was launched in March 2015 it was €60 billion per month and set to end this September. That valued the stimulus at just over €1 trillion. The current programme is worth around €1.7 trillion – a 70% increase – as bond purchases now total €80 billion per month and are set to run until March 2017.

The ECB may have to expand the universe of eligible bonds as part of its seemingly never-ending struggle to kick-start the euro zone's economy. This could be by either buying into bonds yielding less than the deposit rate or by buying bonds below the two years' maturity.

A recent Reuters poll of 70 analysts suggests that the ECB will take no action when it meets today but will extend its QE program before the year-end. Analysts expect the ECB to make downward revisions to its growth and inflation projections.

The FTSE 100 ended the day 20.5 points higher at 6,846.6

The German DAX rose 65.8 points or 0.6% to end the day at 10,753

The US30 closed down 12 points to finish at 18,526.1. The S&P 500 fell 0.01% to close at 2,186.2 while the Nasdaq 100 gained 0.05% to close at 4,831.9

Equities

Shares in Sports Direct (SPD) fell sharply yesterday as it held its annual general meeting. A report from the company’s legal advisers (and commissioned by Sports Direct itself) was highly critical of working conditions. The report said that conditions at the company’s Shirebrook warehouse in Derbyshire were closer to "that of a Victorian workhouse than that of a modern High Street retailer". Management of Sports Direct, where founder Mike Ashley is the majority shareholder, promised reform.

A number of major shareholders including Standard Life voted against the company’s remuneration report and against the reappointment of all of the non-executive directors. Sports Direct revealed that chairman, Keith Hellawell, had offered to resign over the weekend. However, the company asked him to stay on the board. At yesterday’s AGM Mr Hellawell said he would quit next year if he fails to win the backing of investors. The stock ended the day 8.7% lower at 319.3 pence.

Commodities Update

Crude oil traded in a relatively narrow range for most of yesterday. However, Brent and WTI both flew higher in late trading following the latest update on US inventories from the American Petroleum Institute (API). The data showed a stock drawdown of 12.1 million barrels last week. The market had expected a build of 200,000. Investors will be watching to see if this huge disparity is reflected in today’s inventory report from the Energy Information Administration.

Crude flew higher at the beginning of the week ahead of a joint statement from the world’s two top oil producers, Russia and Saudi Arabia. Investors were convinced that the two countries would announce their backing for a production freeze which is due to be discussed at a side meeting of the International Energy Forum conference in Algeria between 26th and 28th September. Unfortunately, their statement fell short of expectations as the two countries made no mention of an output freeze. Instead, Saudi Arabia and Russia said they were going to set up a working group to observe the market and then make suggestions regarding future investment in order to bring price stability. Later on Russian Energy Minister Alexander Novak said a production freeze would be one way to stabilize prices. However, the Saudi energy minister, Khalid al-Falih, said that a freeze was a “favourable option, but not necessary today.” Crude soon gave back most of its early gains. 

Overall, there’s little likelihood of a deal being reached later this month. Iran, OPEC's third largest producer, has said it would only cooperate in talks if fellow exporters recognized its right to regain market share back to pre-sanction levels. Iran is currently pumping around 3.8 million barrels a day and wants to boost production to 4 million within the next few months. Yet as with the Doha meeting in April, it seems unlikely that Saudi Arabia will be prepared to grant Iran an exemption from any production freeze.

Gold and silver drifted lower yesterday. Both metals gave back some of their gains from earlier in the week as the US dollar steadied at lower levels. Gold and silver have both rallied sharply since the end of last week due to the release of a pile of disappointing US economic data. This has included weak ISM Manufacturing and Non-Manufacturing PMIs, a poor second quarter GDP reading and Friday’s Non-Farm Payroll miss. On top of this, Average Earnings and the latest Core PCE update suggest that inflationary pressures remain weak which will make it particularly difficult for the Fed to reach its 2% inflation target anytime soon. Taken all together, investors decided that the probability of a September rate hike has fallen considerably. This led to a sell-off in the US dollar and a corresponding rally in gold and silver. The two precious metals 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 US dollar and euro were becalmed for most of yesterday’s trading session as investors held fire ahead of today’s ECB meeting. However, there was some movement in FX as sterling came under pressure and the Japanese yen pushed higher.

The British pound slipped in early trade giving back some of Tuesday’s gains. This appeared to be little more than profit-taking, which was encouraged by a weaker-than-expected reading on the UK’s Manufacturing Production. Sterling recovered later in the day as Bank of England Governor Mark Carney testified before the UK Parliament’s Treasury Committee. Mr Carney batted away criticism of his warnings concerning the UK’s economic outlook should Britain vote to leave the EU. He also insisted that the Bank had not been too aggressive when it cut rates, boosted its Asset Purchase Facility, launched a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate and announced the purchase of up to £10 billion of UK corporate bonds. Yet he went on to say that the Bank had expected the UK’s Manufacturing, Services and Construction PMIs to bounce back after the initial impact of the June referendum result. If that truly is the case then perhaps he can tell me what I’m getting for Christmas.

The Japanese yen rallied after it was reported that officials at the Bank of Japan (BOJ) are divided on the issue of providing fresh monetary stimulus. The BOJ meets on the 20th/21st September (same as the Fed) and its worth remembering that Japan’s central bankers underwhelmed the markets after their last meeting at the end of July. Back then the BOJ left unchanged both its key interest rate and its bond purchase programme. However, it made a minor tweak when it increased its exchange-traded fund purchases to an annual pace 6 trillion yen, up from 3.3 trillion yen. More importantly, the BOJ said it would conduct a review of the current policy settings and the economic environment when it met in September. If BOJ officials are now showing a reluctance to provide further stimulus, then the yen could rally further.

Upcoming events

Today’s most significant economic event is the ECB’s rate decision and Mario Draghi’s subsequent press conference. We will also see data on Canadian Building Permits. From the US we have Weekly Jobless Claims and Crude Oil Inventories. 

Disclaimer:

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

Tagged: AM Bulletin

Category: AM Bulletin


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