Market News & Insights
9 December 2016

Do Not Use the T-Word

It’s been funny reading some of the rhetoric around yesterday’s ECB meeting, headlines like “ECB unexpectedly cuts its monthly asset purchases”. They didn’t. They extended it for at least another 9 months, likely more if necessary, albeit at a smaller size than current purchases. However, market expectations were for a 6 month extension and even with the smaller purchases each month we will still be seeing over €60bln in additional easing vs expectations, and with forecasts indicating inflation below 2% into 2018 there is no sign that the ECB are looking at winding it in any time soon. Stocks traded higher through Europe as the prospect for additional support for the region buoyed appetite, while the single currency faced selling despite an initial rally. In the US stocks edged higher once again, the USD was also an outperformer on the day, the USD index rising over 1.75% at its peak. In overnight trading the JPY was weaker as Asian equity bourses traded higher.

There was an interesting reaction around the Euro through yesterday’s ECB meeting as Mario Draghi confirmed they would be extending QE beyond March but at a pace of €60bln vs €80bln currently. The Euro initially spiked higher, EURUSD touching the years open towards 1.0875 before quickly selling back lower. The reason? It appears a misinterpretation by markets, or focus on the T–word. We have been here before when the Fed looked to slowly wind down the pace of their asset purchases within their program timeframe, the taper tantrum, as the process dragged out due to slower growth, saw markets and the USD volatile around this. The ECB however is not winding down their program, this is not a taper, this is an extension of the program from April 2017 to December 2017 at the very least. It was clear from the press conference headlines that Mario Draghi was not happy with the line of questioning around “tapering”, he was adamant it had not been discussed and once again vowed the maintain easing or extend it once more, for as long as it was necessary. It’s likely to be another two years at the very least before we see an end to ECB purchases, and with that we can expected Euro upside to remain limited. EURUSD traded back lower towards 1.0600 where it’s found some support and been in consolidation since. EURGBP briefly traded up towards .8600 areas where we have plenty of resistance lined up, highs were at .8573 but we have since dropped back to trade towards .8430 area, where the 200 day moving average just above .8400 provides support once more. The outlook remains bearish for the euro however and progress back towards last week’s post Italian vote lows is not off the cards.

We have a quiet calendar in front of us today with not much to look forward to until consumer confidence in the US later this evening. For the greenback however attention will already be starting to drift towards next week’s FOMC meeting and with that we may well see the USD treading water. While we have pulled back from the recent top, the USD index still sits above 13 year highs and the dollar’s direction will be dependent on the outlook and appetite for the Fed to hike further next year. For months we highlighted the Fed could not raise rates without first convincing markets they would, and having the data to back that up. In recent month they have done just that while US data has been passable to improving. The perfect combination for the Fed and it is taken for granted they will raise rates next week. What happens next is the key however, markets are now looking towards another 3 rates hikes next year, a very similar position to this time last, where after the December hike the dollar plummeted through H1 as it became apparent there would be no more rate hikes. Markets will have an eagle eye on the Feds rhetoric, and if the dollar is to continue to soar, we’ll need to see plenty of Fed hot air.