Good morning!

The main event yesterday was without a doubt the OPEC meeting which, as it was indicated earlier this week, concluded without a cut in production. The response of the markets was rather foreseeable, with oil prices seeing additional downside pressures (crude oil now trading below 70USD), energy producers incurring a decline in their capitalization, commodity producing countries taking a hit and, at the other end, oil consuming sectors/countries enjoying greater demand from investors. As such, the energy sector was the only one of the EuroStoxx50 to close lower yesterday (-3.24%), with Total SA dropping by as much as 4.05%. Similarly, in the high yield market energy-related names (e.g. Gazprom, Vedanta, Chesapeake) traded wider. Among those standing to lose from yesterday’s decision we also highlight Venezuela which indeed expressed its disapproval; the country’s disruptive economic policies including among others a high overvaluation of the currency have already taken a toll on inflation and FX reserves and a decline in oil export revenues can only aggravate the condition of its finances. In contrast, oil importing countries, such as India which has traditionally run a sizable trade balance deficit stand to benefit from lower oil prices. It thus come as no surprise that S&P Sensex Index had a strong day and closed at a new high. In terms of sectors that should be positively impacted we highlight airlines and utilities, with the latter gaining 1.25% on Thursday and featuring among the best performing names in Stoxx50 (eg. GDF Suez which gained 2.29%). Gains should also accrue to the consumer discretionary sectors as for many countries lower oil prices should translate in an increase in purchasing power.

For European markets another noteworthy event yesterday was ECB President Draghi’s speech who said that if the policymakers note that the measures taken so far are insufficient they will act to increase asset purchases. Nothing was really new here but what really got investors’ attention must have been the flexibility that characterized his discourse “what assets? All range of assets. At this point of the discussion, the discussion is quite open. It’s been going on in several meetings.” In response, the European equity markets gained but probably more notable were the movements in government bond yields. Specifically, in a sign that markets are positioning for sovereign bond purchases, the 10 year German yields fell below 0.7%, the French 10 year government paper traded for less than 1% and peripherals spreads tightened; among the latter the sole exception was Greece, for which the yield increased to 8.175% as the authorities are yet to agree the 2015 fiscal targets with IMF and the latest survey showed that the main Opposition Syriza Party leads in polls; the country is due to publish its GDP figures today.

The movements in government yields were supported as well by the higher than expected drop in Spanish consumer prices and the dismal reading for private Euro Area loans (-1.1% YoY). Of note, the weak monetary data was partly offset by the better than expected German unemployment data and an increase in European consumer confidence. Such a mix is kind of a sweet mix for markets as it keeps the possibility of monetary easing alive but speaks of a relative resilience of the economy. Relatedly, we note that today started off with a better than expected change in German retail sales and later on today we will be digesting the euro area inflation and unemployment. In sympathy with the European markets, the US 10 year note also tightened to yield 2.2%. It is thus increasingly evident that even as the economic growth cycle is consolidating in the US the long term rates are kept at bay by the relative spread pickup that they offer when put against other developed countries; that is, with core European countries now yielding less than 1% and some peripheral sovereigns – Italy and Spain- offering less than the US, the attractiveness of the later is raising. In a similar vein, we highlight that the UK 10 year bonds fell to 1.9% and the 30 year note traded at a record low. Such movements in rates bode well for investment grade paper although the sustained drop in EUR spreads suggests that the effects of a possible quantitative easing have been to a large degree discounted; in contrast, the USD and GBP Investment Grade spreads have lagged behind.

Have a nice day!