ECB disappoints

Good monring!

The much awaited ECB meeting failed to kindle investors’ risk sentiment and was in actual fact among the factors pushing markets lower yesterday. ECB’s Draghi attempted to provide more clarity on the assets buying program proposed recently but failed to provide a quantitative target as markets’ have been hoping. This lack of commitment towards a figure inherently increases uncertainty while concurrently making markets wonder if this was not provided because the ECB itself is not yet sure how many eligible Asset Backed Securities (ABS) it will be able to source. The negative reaction was likely magnified by the recent disappointing take-up in the first TLTRO auction, another ECB toll crafted just months ago to spur growth. It should then come as no surprise that equities dropped, with the Eurstoxx 50 losing as much as 2.77%. The disappointment transpired as well from the performance of the EURUSD exchange rate which rebounded to approach 1.27. On a more positive note, Draghi confirmed that the criteria will be eased so as to allow for the purchase of lower rated ABS provided that the home sovereigns are subject to an international financing program. To put it differently, Greek or Cypriot assets will be eligible as long as the two countries remain under IMF/EU programs, which is at odds with the recent noise around a possible move of Greece towards financial independence.

To add to the risk aversion, the media reported that Ukrainian separatists have intensified their attacks yet while a NATO spokesman was quoted as saying that Russia still maintains a sizable military force in the proximity of the Ukrainian border (i.e. around 20,000 troops according to Reuters). On the other hand, there was some room for relief in Putin’s assurance that capital controls are not being considered, “we don’t plan to introduce currency restrictions or restrictions on the movement of capital”.

Emerging markets followed the European ones lower as the approach of the Brazilian elections and developments in Argentina increased uneasiness. While the holders of Argentinean bonds are still awaiting clarity on how the coupon payment due September 30 will be effected, the Central Bank’s Governor resigned and was replaced by Alejandro Voli, who is seen as a person closer to the Government. Of note, the previous Central Banker was advocating for a devaluation of the currency, whereas the President and her administration were opposing such move which nevertheless would have been positive for bondholders as it would have served to protect the international reserves. In the Asian markets, performance was hampered by the drop in Chinese non-Manufacturing PMI and by the continuing protests in Hong Kong; the pro-democracy students reportedly blocked access to the Governmental offices, prompting the officials to agree to negotiations.

In the US, the new factory orders posted a 10.1% monthly decline reflecting the change in aircraft orders; excluding the latter, which are inherently volatile, the decline stood at 0.1%. As another sign that the growth momentum is not abating, the weekly unemployment claims declined to 287k, beating expectations. Relatedly, we note that today the monthly payrolls growth figure is awaited. Against a backdrop of generally improving economic statistics, the US high yield retail funds saw another surge in outflows during the week ending October 1st ; what is more, withdrawals amounted to USD2.3 billion, marking the second largest outflow on records (after the USD7.1 billion reported in the first week of August).

Have a nice day!

Raluca