With this month soon due to come to an end, investors are eagerly and anxiously awaiting the December events, most notably the monetary policy meetings of the European and US central banks. Much has been written about these two events and apparently the majority of analysts, market participants and journalists expect ECB to announce a new round of stimulus as soon as next week. The performance of the market over the past week is testimony of such projections with European equities set to close the week higher despite noteworthy geopolitical events and government bonds remaining well supported. Taken together, this suggests that what is driving the market are expectations for additional liquidity.
Having said this, it is worth highlighting that the European high yield market failed to replicate the optimism posted by other asset classes though it might catch up over the next few trading sessions. Indeed, mid-week sentiment was hit by news that Abengoa, a Spanish B-rated issuer, will file for creditors protection but as concerns of contagion wear off we should see the positivity returning to the markets.
Given the commentaries passed on by various ECB officials over the past few weeks, I am among those looking for a QE top-up announcement this December. Having said this, it is hard to tell what number markets are expecting and what form of programme alteration are they looking for (i.e. increasing the amount of monthly purchases or extending the length of the programme). In any case, even if a major negative surprise is adverted, the buoyancy in the markets will likely not be as evident as it was post the January QE announcement. This is because markets appear to have transitioned to a more normal volatility regime following repeated and various risk events this year. Some potential perturbations still persistent, among which emerging markets, commodities, Fed (its communication rather than its policy) and geopolitical conflicts.
Moreover, bond investors still bear in mind the carousel spin they experienced in late Q2 and, to a lesser extent, during Q3. Relatedly, over the last few weeks, we saw the medium term yields of some Euroarea Government bonds slipping to record lows, even as the longer dated bonds moved by just a few basis points and failed to re-test this year’s lows. Taking Germany for instance, the 2- year yield slumped to -0.42% (compared to the -0.25% low set earlier this year) while the 7 and 10 year maturities have failed to follow suite. This might suggest that the pre-announcement positioning has been this time round less aggressive than in late-2014 or that investors are becoming more optimistic about the long term outlook. On this note, next week we will have the updated ECB staff projections, a generous sequence of new statistical data and Fed’s Chair testimony before the Joint Economic Committee.
On the data front, for the upcoming week I would highlight the inflation preliminary release for Eurozone, the employment and earnings figures for the US and, on Tuesday, the Chinese PMIs.
Have a nice day!
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