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Thu, 19th January 2017

Anirudh Sethi Report

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Archives of “Analysis” Category

Draghi refuses to comment on Trump EU claims; tells Germans to ‘be patient’

Mario Draghi has refused to respond to Donald Trump’s claims on the EU’s disintegration, saying he was unwilling to talk about the president-elect’s stance that keeping the federalist project together will be “harder” than imagined.

At his latest press conference in Frankfurt, Mr Draghi said he would only respond to “policies rather than just statements”, ahead of Mr Trump’s inauguration as president tomorrow.

The Italian was however more vocal on German criticism of the ECB’s record low interest rates, telling savers in Europe’s largest economy to “be patient” in the wait for higher interest rates.

“Real rates will go up” as the recovery regains momentum he said.

Mr Draghi’s broadly dovish tone on inflation has seen the euro weaken to its lowest in 10 days this afternoon. The ECB president said much of the recent spike in prices was down to higher energy prices with wage growth and other evidence of higher economic activity still low.

He also refused to make any comment on the looming bailout of one of Italy’s biggest banks and the implementation of new EU rules which will impose losses on junior bondholders.

US jobless claims fall to 43-year low

The number of Americans applying for first-time unemployment benefits plunged to a 43- year low last week, reinforcing the picture painted by recent economic indicators of continued strength in the US labor market.

US jobless claims fell by 15,000 to 234,000 in the week ending January 14, according to the Labour Department — confounding market expectations for a rise to 252,000.

The figures would represent the lowest level of weekly claims since July 1973.

Draghi: December ECB decisions have succeeded

  • ECB will look through HGICP if it deems it transient
  • Underlying inflation pressure are subdued

There’s the “we’ll ignore inflation” comment. EURUSD slips to 1.0622

  • Borrowing costs have benefitted from ECB decisions
  • ECB will continue to preserve a very substantial degree of accommodation
  • Will use all instruments in mandate if necessary
  • Data points to somewhat stronger growth in Q4
  • Global recovery somewhat stronger
  • EZ growth dampened by sluggish structural reforms
  • Outlook risks tilted to the downside
  • Downside risks relate to global factors
  • There are no convincing signs of an upward trend in inflation
  • Underlying inflation expected to rise more gradually over medium-term

The constant remarks on brushing the recent rise in inflation is hurting the euro.

  • Structural reforms need to be stepped up substantially
  • Reforms are needed in all EZ countries
  • Fiscal policies should also support the recovery but stay within rules

 

Will ‘Dull Draghi’ Talk Up Downside Risks? – ECB Press Conference Live Feed

With Yellen hell-bent on tightening into Trump’s fiscal stimulus, and inflationary impulses popping up all around the world, ECB president Mario Draghi better note some serious downside looming (after leaving rates/taper unchanged) that opens the door to his un-tapering or the stagflationary pressures building everywhere willcome back to bite his precious asset prices.

As we noted earlier, with the market not expecting any changes from the ECB this morning, so far that is precisely what it got, when moments ago the ECB announced that it kept all of its rates unchanged as expected, keeping the rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility at 0.00%, 0.25% and -0.40%, respectively.

In additional language relating to non-standard measures, the ECB also said that “it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary” and “in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

It also said that “the net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP” and cautioned that “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.” 

In other words, it may move QE up or down, depending on what happens with inflation, in line with the ECB’s December announcement.

ECB leaves main interest rate unchanged at 0.0%

Details of the ECB monetary policy meeting 19 January 2017

  • Prior 0.0%
  • Deposit rate -0.40% vs -0.40% prior
  • Marginal lending rate 0.25% vs 0.25% prior
  • QE purchases €80bn per month

There’s nothing much in the accompanying statement.

PRESS RELEASE

Monetary policy decisions

19 January 2017

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council confirms that it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

The euro did it’s usual 20 pip flip flop in the seconds into and over the release but is back around 1.0660.

Davos 2017: UK will lead world in free trade after Brexit, says May

UK prime minister Theresa May has said Britain will seek to lead the world in free trade after the Brexit vote as she sought to reassure the global economic elite her government would remain a force for liberalisation and globalisation after the EU referendum.

Addressing the annual World Economic Forum in Davos this morning, Ms May said Britain would “step up to a new leadership role as the strongest, most forceful advocate for free markets and free trade anywhere in the world” as it seeks to strike new trade agreements after the referendum.

Despite seeking to align herself with the Davos crowd, the prime minister also used her speech to rail against a “cult of individualism”, quoting conservative British philosopher Edmund Burke in favouring a pace of change that would still “conserve”, in remarks delivered to a subdued main congress hall.

She added the Brexit vote was a decision to “restore our parliamentary democracy and national self-determination. A vote to take control and make decisions for ourselves”.

IEA says OPEC/non-OPEC deal to cut output still in “probation period”

International Energy Agency out with their latest report 19 Jan

  • too early to judge compliance
  • keeps 2017 global oil demand growth f/cast broadly unchanged at +1.3m bpd
  • raises 2016 global demand growth by 110k bpd to +1.5m bpd
  • OPEC crude production fell 320k bpd to 33.09m bpd in Dec
  • raises estimate of 2017 non-Opec supply growth by 175k to 385k bpd
  • keeps estimate of 2017 Opec crude demand unch at 32.9m bpd

Full report here

Oil prices down a tad WTI $52.44 Brent $54.48

USDCAD continues to have a bid under it too at 1.3250

Peaking commodities spur hunt for China’s next bubble

Industrial commodities such as glass and coal have replaced real estate as China’s hot investment this season, becoming the latest in a long list of market bubbles in recent years that emerged as their predecessor popped.

In early January, flat glass futures on the Zhengzhou Commodity Exchange traded around 1,250 yuan ($182) per ton — 50% higher than a year earlier. This climb occurred quickly, as prices on the order of 1,000 yuan in October soared to the 1,200-yuan level by November.

 Futures prices of coking coal, rebar, copper and zinc began surging around the same time — upswings commonly explained as resulting from efforts to curb supply by reining in excess production capacity, or from rising demand for construction materials in a brisk housing market.
 But the most convincing theory ties this growth to investors moving on to a new hot market, creating a bubble in the process. China’s government tightened restrictions on the residential property market around September after home prices surged during the summer. Housing prices peaked by October or so, and had even begun to fall in places such as Shenzhen. This timing suggests that investors took Beijing’s intervention as a sign that the climb was over and locked their sights on commodities as the next big thing.

Boom and bust

This pattern of periodic bubbles is familiar in China. Investors tend to concentrate assets in a specific market, throwing prices off from natural levels until the government steps in with a pin — at which point the hunt begins for the next target.