No surprise from ECB

Good morning!

There is little doubt that yesterday the trend in the European markets was shaped by the ECB meeting which concluded with the same rhetoric – the monetary policy makers reckon that growth risks are skewed to the downside and stand ready to deploy additional measures if and when it transpires that these are necessary. Indeed, it is no exaggeration to say that probably the biggest surprise in ECB’s President Draghi’s discourse was that it started off by talking about the institution’s new premises. Nevertheless, even as the consensus was strong in saying that additional measures are unlikely to be announced for now, the equity markets corrected in the aftermath of the meeting and the EUR appreciated versus the USD. It thus appears that investors were trying to avoid lagging behind the market in the remote event that ECB would have gone for another unorthodox measure, particularly as the year will soon come to an end and time comes for calculating performance figures; thus, even as yesterday’s meeting did not really surprise, the momentum in markets weakened.

Against this backdrop, the EuroStoxx50 lost as much as 1.7%, with lower prices reported across all sectors but most notably in the energy sector for which valuations were trimmed by 3.05%. Financials were also among the worst performers, with a 2.35% loss with losses more marked in the case of peripheral banks, given that they would have been among the largest beneficiaries of additional ECB measures; as such, Santander, Unicredit and BBVA retreated by more than 3%. In the same vein, the government yields closed higher and we note that Draghi’s comments were not enough to trigger a movement in long term inflations expectations; indeed the 5y5y inflation swap, a proxy for the inflation projected five years from now, remains at just 1.8%, whereas in the summer it was standing at a healthier 2.1%, in line with the ECB target. Since yields are meant to include an inflation premium component, this is akin to saying that the catalysts for an upward shift in core-government yields are virtually absent at this stage. The perpetuation of this situation is beneficial in particular for the Investment Grade names and, to a smaller degree, for the non-cyclical high yield bonds. Meanwhile, the EUR High Yield market widened yesterday with virtually all sectors losing some ground albeit in a rather measured way.

In the US on the other hand, the S&P500 Index closed only marginally lower than a day before, a relatively good performance given that a day earlier a new record high was achieved. Nevertheless, a pattern emerged with the energy names being the worst performers here as well. Of note, yesterday it was reported that there might be hope for a strengthening in consumption as the same-store sales for retailers tracked by Swampscott 5.2% in November, whereas analysts were looking for a 3% gain.

The lower oil prices have also depressed valuations and exchange rates in the some emerging markets, most notably Malaysia, Venezuela or Nigeria. Noteworthy, media reported that the state-owned Petroleos de Venezuela is looking to “bring in USD1.7 billion of cash in exchange for the cancellation of about USD4 billion of debt owed by the Dominican Republic”; the oil rich country is challenged by the prolonged overvaluation of the currency and the higher than affordable government spending which have left it with low international reserves and hence with limited room to withstand a decline in oil prices. Meanwhile, lower prices for other commodities, are putting pressure on names like Brazil and South Africa which are in any case challenged by structural issues. Indeed, Fitch warned yesterday that Africa’s largest economy is moving closer to junk. On a similar note, we see the risk of a further retreat in prices of high yield iron ore producers after Cliffs Natural Resources, the largest iron ore producer in the US reviewed its refinancing plans and cancelled a tender offer for some of its bonds.

Elsewhere in the emerging market space, we cannot ignore Putin’s bold comments that made headlines during the day. The Russian leader delivered a long speech which warned against speculations on additional depreciation of the rubble, which year-to-date stands at about 57% as it fell victim to (i) the Central Bank’s decision to move closer to a free-floating regime, (ii) the falling oil prices and (iii) the weakening growth outlook against a backdrop of higher geopolitical risks. Meanwhile, there are reports that the authorities are prompting the local companies to convert the rubble holdings into USD to support the currency. Putin also confirmed that he sees the Western sanctions as conspiratory measures against his country “I am sure if none of this happened, they would have invented another excuse to hold back the growing potential of Russia […] Every time they believe that Russia gets too strong, they use these instruments. But it’s pointless to talk to Russia in the language of force.”

Have a nice day!

Raluca