good morning!

Yesterday we saw some increase in risk aversion which dampened the performance of equities. This was the result of additional sanctions imposed by the European Union on Russia, threats that the US will follow the same path in heightening its restrictions and signs that the nervousness of the US investors increases in anticipation of Federal Reserve’s meeting. Indeed, over the last few weeks the US market somehow acknowledged that the risk of an increase in interest rate could be higher than what is currently priced in. Over the last few days, Fed’s research pointed to a structural decline in participation rate, which is equivalent to a lower labour surplus, and, in a different paper, it also warned that investors are becoming too complacent. On the data front, the rally in US Treasuries yields was supported earlier this week by the strong job openings; although the weekly unemployment claims published yesterday were weaker than expected, they were largely overlooked by analysts which pointed out that the data is noisy given the effect of the Labour Day holiday. Against this backdrop, the US high yield funds have seen a second week of outflows according to Lipper, which puts the latest weekly withdrawals at a sizable USD766 million or USD9.7 billion year-to-date. In this context, the market will be closely looking into the data releases scheduled for today – retail sales and consumer confidence, as these have been one of the few remaining weakness points.

In the EUR markets on the other hand, whereas the interest rate risk is evidently not a concern at this stage, we see signs that investors have read too much into Draghi’s guidance regarding the possibility of additional future measures. That is, the recent weakness in the markets and the retreat in peripheral bonds could be indicative of disappointment after investors have become increasingly confident that ECB might extend its asset purchases program to include sovereign bonds. Indeed, at this stage the likelihood of such QE measures is hard to appreciate given that the latest measures were not supported by all members; in addition, one of the policymakers emphasized yesterday that the ABS buying programme “can neither be equated with a broad-based program of quantitative easing, nor is it an overture for such an opera.” It will thus be interesting to see ECB’s Weidmann comments today in Frankfurt.

Equally worrisome, this flattening in European market sentiment might reflect worries about the efficiency of the latest ECB measures although the rebound in the 10-year German bond points to some alleviation in deflationary fears. In any case, it is widely acknowledged that in the Euro Area, the success of the monetary policy is challenges by the country-specific divergences which call for country-specific measures. In this vein, Draghi once again reiterated yesterday that “no monetary stimulus, indeed no fiscal stimulus, can be successful unless accompanied by the right structural policies – policies that foster potential growth and instil confidence.” In his most recent speech the ECB President also highlighted that the rebound investments hinges on such reforms, implying that the problem is not solely in the availability of credit. Meanwhile, a director at Fitch was quoted as saying “the market is more positive than us on Portugal, Spain and Italy.”

During the Asian session, the sentiment in the market was also impacted by below expectation growth in Chinese credit and weaker than anticipated growth in monetary aggregates, although the later could equal push expectations for stimulus. On the geopolitical front, investors will be looking into the details of the new sanctions levied on Russia and follow the speculations about the possible counter response. According to Reuters, the later might include caps on “car imports, mainly used cars and on certain types of light industry goods”. Elsewhere, the political agenda includes the Scottish Referendum; of note, RBS and Lloyds, disclosed their contingency plans in the event that the poll concludes with a “Yes” majority and these basically imply the relocation of their headquarters to England.

In the emerging market space, Venezuela saw some relief in bond prices pressure after President’s speech which included a strong commitment towards investors “We’re ready to keep meeting our international obligations completely, down to the last dollar […] What Venezuela has demonstrated in the last 15 years of revolution is that it meets its obligations, and this year won’t be an exception”.

Have a nice day!