Good morning!

In Europe, markets were driven yesterday by ECB’s Draghi press conference which in the main was about stressing the bank’s readiness in stepping in if the economic trends warrant it. That is, no new measures were announced but the Governor reiterated that he targets an increase in the balance sheet to EUR3 trillion (from around EUR2 trillion) and that the bank “tasked relevant Eurosystem committees with the timely preparation of further measures to be implemented if needed”. In line with other institutions, Draghi reckoned that there are indications that a downwards revision in forecasts will follow and warned once again that “insufficient progress in structural reforms in euro-area countries constitutes a key downward risk to the economic outlook”. In this context, we note that Merkel yesterday committed to allocating EUR10 billion to investments in 2016. Furthermore, the ECB attempted to dismiss concerns around the lack of consensus in the monetary policy committee by having the press release signed by all the members of the committee; on the same lines, during the press conference Draghi said that there is no geographical (i.e. north-south) division in opinions as the media often suggests.

In the aftermath of ECB’s Governor speech, European equities experienced a strong but short-lived rebound and closed only marginally higher whereas the 10 year German Government bond gained a few basis points but closed the day almost unchanged; in the currency market the effect was more persistent with the EURUSD exchange rate stabilizing below 1.24. We see two possible tests for the European markets today – a potential disappointment in the German and French industrial production data and the headlines regarding the aggravation yet again for the conflict in Ukraine. Regarding the former, below expectation data would serve to confirm whether Draghi’s efforts to stress the ECB’s commitment towards fighting deflation is credible enough to offset dismal data or whether such data will rather aggravate worries that the Central Bank will act too late. Relatedly, we note that yesterday the German factory orders posted a monthly growth rate of 0.8%, below the 2% consensus forecast.

During the US session, gains were supported by the upbeat weekly unemployment claims and the positive surprise in productivity. In the treasury market, the data seems to lead once again to a re-pricing of the short end of the curve, which in our minds reflects the greater sensitivity of the short tenors to changes in central bank rates. Indeed, the 2 year US government rate is now at 0.55%, approaching levels seen before the October selloff pushed it as slow as 0.3%. Further up the yield curve, at the 10 year maturity, the levels have also increased but only marginally and remain low when put against the 2.6%-2.7% seen earlier this year. These developments suggest that investors acknowledge the improvements in US fundamentals but see the interest rate risks manageable in view of the weak momentum elsewhere and falling commodity prices. Regarding the letter we note that yesterday OPEC cut its demand forecasts, pushing oil prices lower; the organization will be meeting on November 27th. The strengthening confidence in the US credit market emerges as well from the latest data on retail high yield fund flows which showed that the inflows over the last week amounted to USD2.4 billion, the largest contribution reported year-to-date; however, the net cumulative flow since the beginning of the year is still negative at USD15.9 billion. It thus appears that markets are positioned for strong employment data today.

Besides economic statistics, today’s agenda includes the ECOFIN Meetings, ECB’s Coeure and Constancio speeches and, in Paris, Fed’s President and BOE’s Governor speeches, which could provide some insight into the future path of the fiscal and monetary policies.

Have a nice day!