Markets today breathed a sigh or rather a deep sigh in response to Draghi’s comments earlier today. The ECB will continue with its bond buying programme. However, the purchases will be scaled back. Starting January, the ECB will buy approximately $35 bio a month. This is about half of the amount the ECB currently purchases. The ECB reserves the right to return to its current policy should inflation remain very low.
Markets reacted in a positive fashion. The ECB announcement helped to stir the U.S equity market as much as it did the U.S. treasury market. Bonds staged a small recovery as a result. The Dow and the S&P rallied on the day. The third quarter earnings season is about halfway through and about 74% have topped expectations, that is slightly above the 72% that beat expectations for 4 quarters. Earnings growth for the quarter however is 5.3%, well below the double-digit growth of the previous 2 quarters.
Optimism was buoyed somewhat by the approval of the Budget Plan, paving the way for the Tax Reform Bill. The victory was narrow with 216 to 212 voting for the Bill with some 20 GOP members joining the Democrats. Of interest was that two-hard line fiscal GOP conservatives voted against the Bill. The politics will be very interesting over the next couple of weeks. The GOP want the Bill passed by Thanksgiving and that could be a tall order with detail yet to be fleshed out.
Today also saw Trump declare an Opioid Crisis a Public Health Emergency. This was just short of a State of Emergency which would require Congressional Approval. But it does underscore the problem.
China issued $2 bio of bonds yesterday. Nothing remarkable there other than a whopping $22 bio of bids were received. The bonds were not rated in response to the downgrades received from Moody’s and S&P. There were two issues, a 5 -year bond and a 10-year bond. The spreads were for the 5-year, U.S. treasury +15 bp and for the 10 -year Treasury + 25 bp. This represents about 25bp of tightening from earlier guidance.
On the day hedge fund maestro Ray Dalio warned about bond market perils.
And in another twist, German power producers will be providing free power this weekend. Apparently, the wind power generators will be producing so much power this weekend that prices for electricity will slide below zero. The amount of power being generated this weekend is equivalent to about 40 nuclear power stations in full throttle and about half the total power required for daily usage in Germany. The other alternative is to turn the power stations off and once off line the stations then require some time before they can produce again. This is yet another blow for the coal industry.
Barclays reported today, and the results showed a decline in trading revenue. Barclays appear to be challenged by the current environment and the results are starting to make Deutsche Bank look good.
Equities: the S&P 500 rose 0.13%, the Dow rose 0.31% while the Stoxx 600 rose 1.1%.
Currencies: The euro fell 1.4 % and the pound fell 0.8%. The Bloomberg Dollar Spot Index rose 0.7%.
Bonds: saw a selloff across the curve. The 2-year weakened 2bp to close at 1.619%. The U.S. 10-year closed 2.463% out about 3bp. The 30-year closed at 2.952 % weaker by about 1 bp on the day. The yield curve maintained its shape. The European 10-year benchmark closes were, gilts closed at 1.38%, bunds at 0.419% and OAT’s 0.673%. European bonds rallied on Draghi’s dovish comments.
Commodities: Gold fell 0.8% and WTI rose 0.9%. Copper fell 0.3%
Aussie Market Today.
Aussie bonds are likely to remain weak today. With a weak close from the U.S. and little local direction bonds will remain under pressure. Today is the day of the High Court decision regarding dual citizenship and whether a number of Parlimentarians should be forced to resign because they were dual citizens.
The rules are pretty clear but it seems unlikely that the High Court will rule against the sitting members as that would cause a Constitutional Crisis. Should the High Court against then the day could get rather ugly.
Credit for the moment appears well bid and demand continues.