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Equity/Bond Markets At Overnight Highs On Hopes Of More ECB Stimulus; Geopolitics On Back Burner
Even as the NATO summit began hours ago in Wales, conveniently enough (for Obama) at the venue of the 2010 Ryder Cup, so far today geopolitics has taken a backseat to the biggest event of the day - the ECB's much hyped and anticipated announcement. So anticipated in fact that even as it has been priced in for the past month, especially by BlackRock which is already calculating the Christmas bonus on its "consultancy" in implementing the ECB's ABS purchasing program and manifesting itself in record low yields across Europe's bond market, Reuters decided to milk it some more moments ago with the following blast:
Plans to launch an asset-backed securities (ABS) and covered bond purchase programme worth up to 500 billion euros are on the table at Thursday's European Central Bank policy meeting, people familiar with the discussions say. ECB President Mario Draghi will likely announce such a programme at his news conference unless it comes up against strong opposition at the Governing Council's policy meeting.
The programme would have a duration of three years and comprise both ABS and covered bond purchases. The ECB could begin buying the assets this year, the people familiar with the discussions told Reuters.
The ECB declined to comment.
The notable being the size of the program, which at €500 billion, is precisely what Deutsche Bank said a week ago the size of the ABS program would be. Almost as if the bank with the world's biggest derivative exposure is helping coordinate the "Private QE"...
And since DB is now clearly running the game behind the ECB scenes, here is what they had to say overnight:
The ECB rightly gets top billing today as following Mr Draghi’s speech at Jackson Hole our economists now expect the announcement of ABS purchasing today - the so called 'Private QE'. They believe that recent weak data and Draghi's warning on inflation expectations are enough to justify the supplementary measures although they admit that it is still a close call. While they certainly don't think the ABS programme is technically ready to launch yet, they expect the ECB to "firmly commit" to it. They feel the objective of the scheme will be to incentivise bank lending and that its success will depend on three elements: size, regulation and the ECB willingness to take on credit risk.
The reality is that whatever Draghi does or doesn't deliver, the success of today's meeting for markets might rest on how open he allows himself to be on the prospect of future QE. For us this is why 'private QE' might be seen as a welcome stepping stone to a greater policy response rather than being a game changer itself. However he will likely need to somehow offer the carrot of future QE for the recent performance of European assets to continue in the short-term. Given the political issues involved in asset purchasing today's Q&A could require Draghi's best diplomacy efforts as he balances what the markets want to hear against what perhaps those at the very core are comfortable with him saying at this juncture. An interesting meeting awaits.
So will the ECB not disappoint the market and do as has been priced in by everyone (even if the ultimate benefit of such a program will be non-existent once again)? Or will Draghi just hem and hew some more, and send the EURUSD over 100 pips higher? The answer will be revealed in 45 minutes, when the ECB statement is unveiled, and certainly in 90 minutes when Draghi's conference begins.
Elsewhere, Asian markets are somewhat mixed overnight with the Nikkei (-0.2%) consolidating after a decent positive run over the last few days. The BoJ’s two day meeting concluded overnight and as mostly expected the central bank retained its monetary policy stance of increasing its monetary base at annual pace of JPY60-70trillion. Chinese equities (+0.2%) are doing better overnight led by property developers on news that the government is allowing them to tap the interbank bond market for bond issuances in order to relief funding pressures. There’s also news that the Chinese government may reduce its holdings in the state banks further as it encourages more private-public ownership structures.
European equity markets trade mixed ahead of the ECB rate decision, with the benchmark DAX underperforming as the second-largest stock, BASF fall 1.5% after being downgraded by Credit Suisse. The FTSE-100 slightly outperforms, as Standard Life shares rise at the fastest rate in three years after the sale of their Canadian arm frees up GBP 1.75bln for shareholders.
It's a busy day in the US data wise, in addition to the ECB meeting, with ADP, Trade Balance, Jobless Claims, Nonfarm Productivity and the Markit Services PMI all on deck in the morning.
Bulletin Headline Summary from Bloomberg and RanSquawk
- European markets tread water ahead of the ECB rate decision, where traders await any clues on further liquidity provision from ECB’s Draghi
- Draghi runs the risk of a sharp reversal in the low EUR, low yield environment created after his Jackson Hole appearance should he disappoint the market today
- Treasuries steady before rate decisions from Bank of England, ECB and Draghi press conference; jobless claims and ADP also due before August nonfarm payrolls tomorrow.
- $24.25b IG deals priced yesterday, heaviest single-day volume this year. Eight HY drive-by deals priced for $5.84b, most since April 23. $119b IG expected in September, $31b HY
- While most economists predict ECB will keep rates on hold and refrain from large-scale QE, banks from Commerzbank AG to Barclays Plc say Draghi may commit to buying ABS amid deflation risks, tensions with Russia
- German factory orders rose 4.6% in July, the biggest increase since June 2013 and exceeding the 1.5% median in a Bloomberg News survey
- Sweden’s central bank kept its main interest rate unchanged and stuck to a plan to tighten policy at the end of next year in a bet that a surprise half-point cut in July was enough to fight back the threat of deflation
- People who help manage $2.6t of money-market mutual funds have a message for the Fed: When the time comes to raise interest rates, you may have to rely on us more than you would like
- NATO Secretary General Anders Fogh Rasmussen called for “genuine effort” from Russia to commit to peace in Ukraine’s east, saying the alliance still sees Russian involvement in the deadly conflict
- Putin will continue his shadow war until he’s created quasi- statelets in Ukraine’s easternmost regions with veto power over the country’s future, five current and former Russian officials and advisers said
- Al-Qaeda will start a new wing dedicated to waging jihad in the Indian subcontinent and beyond, the terror group’s leader Ayman al-Zawahiri announced in a 55-minute video posted online
- East Lodge Capital Partners LLP is buying protection against losses on U.K. government debt and the pound before the Scottish independence vote in two weeks’ time, according to a person familiar with the matter
- Americans increasingly want tighter border security and tougher immigration enforcement, bolstering the Republican position as Obama considers executive action on the issue
- Attorney General Eric H. Holder Jr. this week will launch a broad civil rights investigation into the Ferguson, Mo., Police Department, according to two federal law enforcement officials: Washington Post
- Sovereign yields decline. Asian and European stocks mostly lower, U.S. stock-index futures mixed. WTI crude declines, gold and copper higher
- Today’s ADP Employment Change seen as a key bellwether for tomorrow’s Nonfarm Payrolls report
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, Aug. (prior 24.4%)
- 8:15am: ADP Employment Change, Aug., est. 220k (prior 218k)
- 8:30am: Trade Balance, July, est. -$42.4b (prior -$41.5b)
- 8:30am: Initial Jobless Claims, Aug. 30, est. 300k (prior 298k); Continuing Claims, Aug. 23, est. 2.510m (prior 2.527m)
- 8:30am: Nonfarm Productivity, 2Q final, est. 2.4% (prior 2.5%)
- Unit Labor Costs, 2Q final, est. 0.5% (prior 0.6%)
- 9:45am: Markit US Services PMI, Aug. final, est. 58.5 (prior 58.5)
- 9:45am: Bloomberg Consumer Comfort, Aug. 31 (prior 37.3)
- 10:00am: ISM Non-Manufacturing Composite, Aug., est. 57.7 (prior 58.7)
Central Banks
- 7:00am: Bank of England seen maintaining bank rate of 0.5%
- 7:45am: ECB seen maintaining refinancing rate of 0.150%
- 8:30am: ECB’s Draghi hold news conference in Frankfurt
- 12:30pm: Fed’s Mester speaks in Pittsburgh
- 7:00pm: Fed’s Powell speaks on Libor in New York
- 8:15pm: Fed’s Fisher speaks in Dallas
- 9:00pm: Fed’s Kocherlakota speaks in Helena, Mont. Banks
- 11:00am: U.S. to announce plans for auction of 3M/6M bills, 3Y/10Y notes, 30Y bonds
- 11:00am: Fed to purchase $1.4b-$1.7b notes in 2018-2019 sector
FIXED INCOME
Bund futures trade little changed, amid light volumes as traders await any clues from the ECB head Draghi on asset purchases later today. Draghi is expected to confront the crumbling inflation expectations by at least hinting that the ECB are accelerating their path toward asset purchases.
Spain’s bond sale was smoothly absorbed, with investors taking confidence in expected dovish tones from Draghi later in the day, resulting in lower yields on both lines sold. Similarly in France, the French Treasury recorded record low yields on their 10-, 15- and 30-yr bond lines as the supportive backdrop of central bank intervention keeps interest rate expectations low.
EQUITIES
European equity markets trade mixed ahead of the ECB rate decision, with the benchmark DAX underperforming as the second-largest stock, BASF fall 1.5% after being downgraded by Credit Suisse. The FTSE-100 slightly outperforms, as Standard Life shares rise at the fastest rate in three years after the sale of their Canadian arm frees up GBP 1.75bln for shareholders.
Nasdaq 100 future continues to underperform ahead of the North American open with Apple's (AAPL) German listed shares (APC GY) down 3% once again, continuing the underperformance from yesterday after several competitors released a number of new products.
FX
EUR trades little changed as traders sit on the sidelines ahead of Draghi’s appearance in Frankfurt. Elsewhere, AUD/NZD trades at the highest level since Nov'13 after Australian trade balance surged beyond expectations. USD/JPY sits just below the 105.00 handle as the BoJ unanimously kept its monetary policy unchanged and maintained its somewhat upbeat view on industrial production and capex.
COMMODITIES
WTI and Brent crude futures trade lower as a brief period of strength yesterday is erased ahead of the NYMEX open. This follows yesterday’s API crude inventories showed both gasoline and distillate supplies building by 400,000 bbls apiece. Attention now turns to today’s belated DoE crude oil inventories, where headline crude inventories are expected to fall by 1mln bbls. Elsewhere, Spot gold trades with modest gains, however palladium sharply outperforms (+0.7%) after falling as much as 2.0% yesterday on Ukrainian ceasefire talks.
* * *
We conclude with the traditional recap by DB's Jim Reid
The ECB rightly gets top billing today as following Mr Draghi’s speech at Jackson Hole our economists now expect the announcement of ABS purchasing today - the so called 'Private QE'. They believe that recent weak data and Draghi's warning on inflation expectations are enough to justify the supplementary measures although they admit that it is still a close call. While they certainly don't think the ABS programme is technically ready to launch yet, they expect the ECB to "firmly commit" to it. They feel the objective of the scheme will be to incentivise bank lending and that its success will depend on three elements: size, regulation and the ECB willingness to take on credit risk.
The reality is that whatever Draghi does or doesn't deliver, the success of today's meeting for markets might rest on how open he allows himself to be on the prospect of future QE. For us this is why 'private QE' might be seen as a welcome stepping stone to a greater policy response rather than being a game changer itself. However he will likely need to somehow offer the carrot of future QE for the recent performance of European assets to continue in the short-term. Given the political issues involved in asset purchasing today's Q&A could require Draghi's best diplomacy efforts as he balances what the markets want to hear against what perhaps those at the very core are comfortable with him saying at this juncture. An interesting meeting awaits.
If that wasn't enough we also have ADP which will provide clues as to tomorrow's payroll number. Market consensus is for a 220k headline print which is modestly higher above the 218k we saw last month. While we are on the data, today will also see the usual weekly jobless claims, July’s trade balance and the non-manufacturing ISM report for August. On the latter consensus is looking for a modest decline to 57.7 from 58.7.
In terms of yesterday, market sentiment see-sawed on a series of conflicting Russia/Ukraine headlines. It all began with a presidential statement from Ukraine noting that Poroshenko and Putin had discussed a ‘permanent ceasefire’ over the phone and there was mutual understanding to promote peace. However, this was categorically denied by Putin’s spokesperson who said that while the two leaders’ position ‘largely coincided’, there was no mention of a ceasefire as Russia is not a side in the conflict. Ukraine subsequently changed the wordings on the presidential statement by changing a ‘permanent ceasefire’ to a ‘ceasefire regime’.
Headlines then started to emerge after mid-day on Putin’s 7-point peace plan as he spoke upon his arrival in Mongolia. According to RT.com, here are the 7 points: 1) Militias should cease military advances in the Donetsk and Lugansk Regions, 2) Pro-Kiev armed forces should withdraw to a distance that excludes the possibility of shelling settlements, 3) Implement full and objective international control over ceasefire observation and monitoring, 4) Exclude the use of combat aircraft against civilians and villages, 5) Prisoner/captive-exchange via an ‘all-in-all’ formula without preconditions, 6) Humanitarian corridors for refugees movement and delivery of humanitarian aid across Donetsk and Lugansk Regions, 7) Direct repair-crew access to destroyed social and transit infrastructure with supportive aid. In announcing the plan, Putin said he expects Ukraine and the separatists to reach an agreement after a new round of talks tomorrow in Minsk. It is looking like a big summit with Russia, Ukraine, Europe and representatives of the separatists all expected to attend. In the meantime we could get a final decision on the sanctions tomorrow as well.
In the latest twist, France is now holding back from delivering a warship to Russia next month because of the Ukraine crisis. Indeed this marks a shift in position from France which previously had insisted on moving ahead despite pressure from the West. Russia’s Defence Ministry responded to this yesterday by saying that it would not hold back its plans on modernising its armed forces but ‚of course it is unpleasant and adds to certain tensions in relations with our French partners".
Given the price action yesterday there seems to be growing optimism over some kind of resolution in Ukraine. European equities closed higher across the board and outperformed in what was another muted day for US equities. Russia’s MICEX (+3.5%) had its biggest day since March whilst Russia’s 5yr CDS also narrowed by 28bps to 238bp. In the US, the S&P 500 was almost unchanged on the day although an over 4% decline in Apple’s share price added some pressure on the NASDAQ (-0.56%). Treasuries and Bunds were weaker on the day as some safe-haven flows were unwound but they did close off the day’s highs in yields.
Asian markets are somewhat mixed overnight with the Nikkei (-0.2%) consolidating after a decent positive run over the last few days. The BoJ’s two day meeting concluded overnight and as mostly expected the central bank retained its monetary policy stance of increasing its monetary base at annual pace of JPY60-70trillion. Chinese equities (+0.2%) are doing better overnight led by property developers on news that the government is allowing them to tap the interbank bond market for bond issuances in order to relief funding pressures. There’s also news that the Chinese government may reduce its holdings in the state banks further as it encourages more private-public ownership structures.
In other stories, the Fed has warned that the largest US banks will face a US$100bn shortfall in order to meet the new liquidity coverage ratio requirements. Per the FT if the ratio were applied now, banks subject to the new measures would have to hold a total of about US$2.5tn in high-quality liquid assets over a 30-day stress period, which implies a $100bn shortfall.
In terms of today besides the US data we mentioned above we also have factory orders in Germany and the BoE rate announcement in the UK. All eyes will be on ECB though.
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Let me guess...futures are up.
Do I win something?
Aw shucks, how did you guess that?
DavidC
There's only one reason Draghi needs to keep rates low!
https://www.youtube.com/watch?v=zV3UuMOfiaQ
"They feel the objective of the scheme will be to incentivise bank lending"
....but the real reason is to ________________.
(Hint: It rhymes with "backstop all banks forever no matter what they do")
If it was serious they would lie. But if they lie, does it mean it's serious?
Wow, such a surprise.
WWIII Bitchez........
More printing money out of thin air to keep the markets elevated. Until the printing stops.... It's all Bullshit!!!
Dope and free money......it's the engine that keeps America running.
30 Million Americans On Antidepressants And 21 Other Facts About America's Endless Pharmaceutical Nightmare
There's a pill for that, but you'll get exhausted trying to swallow the sucker whole, so I suggest you break it up first, then mix it with something sweet, or alcoholic, then call me or the dr, maybe both, in the morning and you should fine.
You win a new car or a old hand bag, your choice, make the right one.
must take out yesterdays highs at all costs
Must is a tough nut to crack, but in your case, try anyways.
so DAX up 100, bankrupt FTSEMIB up 350 IBEX up 100 CAC up 50 and of course Dow up 70 from the overnight lows S&P up 8 Russell up 5 and Naz up 25
You would have to think that all this shit has been priced in, but who knows...?
Is that a trick question?, or should I just jump ship in the middle of the river??
Price is fiction in the land of central planning.
Oh well, job done, that will solve all of europes problems then.
Did Bundesbank give the 'OK' for such a program?
Apparently not. Merkel is said to have made a phone call to Draghi just after his Jackson Hole speech.
Ireland appears to be recovering if one looks at recent Electricity Output figures.
http://www.cso.ie/px/pxeirestat/Statire/SelectVarVal/Define.asp?maintable=MSM01
But all is not what it seems.
Purchasing power has been extracted from the resident population and given to the Uk and other external residents.
Much of the apparent energy recovery is a result of incoming tourist consumption increases while Irish residents cannot afford increased external spending.
http://www.cso.ie/en/releasesandpublications/er/ot/overseastravelmarch-may2014/
It would have been so much cheaper to stimulute the banksters blanketing the streets of Manhatten with 3 feet of cocaine and paying Victoria's Secret models to fart it up their noses every 10 minutes
You know that stuff is made of kerosene right, which then finds its way into the blood stream and even some others. So health wise, it's not so cheap now is it? Who let the party go ON!
USJPY HOD ,GOLD & SILVER smacked back down from the earlier highs
May to July figures.
http://www.cso.ie/en/releasesandpublications/er/ot/overseastravelmay-july2014/
irish resident travel is static while the increased purchasing power that we have given to UK residents and others via the process of usury is showing up in many indicators.
irish Average weekly earnings down 1.1% in Q2 2014 yet the price of housing conduits is beginning to hyperinflate again.
This is a result of people outside Ireland with access to credit buying up assets and thus inflating the cost of living while wages continue to decline.
Yet another perfect irish storm awaits us.
http://www.cso.ie/en/releasesandpublications/er/elcq/earningsandlabourcostsq12014finalq22014preliminaryestimates/
EU is at minus 5% GDP for 2014.
If ECB does QE, which means if ECB buys losing derivatives from Deutsche bank and others or ECB is paying northern european manufacturers with southern european bonds.
This will make GDP go to minus 10% next year in 2015. Energy and food prices will shoot up also.
If ECB ends up bailing out insolvent bank lobby oligarchs by further killing EU economy, well then, we may not have an EU at all in few years
Watch out for assassinations
Anything Draghi will do, he discussed with his close buddies beforehand (http://www.group30.org/members.shtml).
I wouldn't exclude him announcing a "surprise move" and trying to tank the markets. Everybody important should have had the time to be positioned accordingly, no?
But not sure if they really can keep the control.
For now, I'll just stick with my guess for a market crash on September 17 2014. Just a day before Scottish referendum. And three days before September options expiry.
Where's my popcorn?
Oh and of course Janet Yellen and Joe Ackermann were in the club as well. http://www.group30.org/past_members.shtml
Every other plenary meeting is hosted by the FED.
Could they be any more obvious?
Another meeting another deception .. but al least the golf is good .. hope everyone brought their clubs .. They can do the Ryder cup already