Risk-on mode gearing up on QE expectations

Good morning!

For another day, European equity markets traded on hopes that the ECB will soon take new measures meant to increase the money supply and, hence, the excess liquidity and the hunt for yield. As such, the massive disappointment in German factory orders early in the morning did not prevent a strong positive open and, if anything, it might have contributed to it. As a side note, the 2.4% month-on-month drop in the German factory orders was largely brought about by a 4.7% decline in domestic orders. Meanwhile, this morning we saw the German trade balance and industrial production coming out below expectations. On a more positive note, the November retail sales data for Eurozone provided a positive surprise, as it showed a 0.6% monthly advance against expectations for a 0.3% growth rate; it is easy to imagine that this might boost hopes that lower fuel prices are feeding into higher consumption elsewhere and hence are positive for the challenged Eurozone economy. Nevertheless, markets are not expecting the ECB to rally on the “mini stimulus” stemming from the lower oil price and instead are positioning for more monetary stimulus. ECB President’s letter to the European Parliament, which was published yesterday can only add to such expectations “Early this year, the Governing Council will reassess the monetary stimulus achieved through the set of measures implemented in the second half of 2014 […]This may imply adjusting the size, pace and composition of the ECB’s measures. Such measures may entail the purchase of a variety of assets, one of which could be sovereign bonds”. As such, the EUR continued to depreciate against the USD, a trend which should boost European earnings.

The prospect of a further fall in European yields is likely to keep the search for yield alive and this appears to encourage a return in corporate bond issuance as companies look to take advantage of the low rates on offer. Just yesterday we saw the first EUR high yield bond placement of 2015 as ArcelorMittal placed a 7 year note for a 3.125% coupon. The steel producer, currently rated BB+ by all the three main rating agencies, is seen as an Investment Grade candidate and withstood the recent weakness in the high yield market well.

Santander took markets by surprise yesterday by announcing a EUR7.5 billion increase in capital and dividend cuts. This sent the issuer’s stock price lower but the bonds gained on the news as a greater capital buffer is equivalent to lower risk for bondholders; indeed, the decision, is a strong positive for this name from a credit perspective as the bank was known to lag behind other names in terms of Basel III eligible capital and it actually refrained from disclosing the core equity ratio under this new regulation framework. Elsewhere in the banking sector, Standard Chartered announced that it will exit some business segments which are deemed underperforming and in doing so it should see cost savings of USD100 million starting from 2016.

Media reported yesterday that Petrobras might incur a multi-billion loss in relation to the ongoing corruption scandal. After the company delayed publishing its financial statements, according to un-named sources quoted by Reuters “The company wants to put this behind it as quickly as possible. It is determined to take all of the loss now as re-calculating past results is too complicated and figuring out the exact value of corruption and overcharging is almost impossible.” However, the markets were not impacted by this headline as the equity closed higher and the bond prices were largely unchanged; this is likely reflective of much of the negativity already being priced in as the bond prices for instance lost some 20 points over the last few months.

Have a nice day!

Raluca