Weekly Market Update
Notable events over the last week
- With the euro area inflation outlook continuing to worsen, the ECB announced a broad policy package in its March meeting, which shifted the focus away from negative rates and towards quantitative and credit easing. The aggregate package delivered by the ECB, was larger than expected although the market reaction was focused on the lack of deposit tiering and Draghi’s remark about rates being at a floor, which was largely responsible for the EUR surge on Thursday. Commentary surrounding the action, suggests that central banks are not as relevant to the market narrative today and are possibly even counterproductive. The world’s biggest central banks have acknowledged the pressure on the financial system with NIRP (Negative Interest Policy) hurting bank’s Net Interest Margin.
- The ECB cut all policy rates including the refinance rate cut by 5bps to 0% and the deposit rate by 10bps to -40bps but rejected the introduction of a tiered system for the deposit facility as it did not want to signal further deposit rate cuts. Secondly, it expanded its QE programme by increasing the monthly purchases from €60bn to €80bn and by adding non-bank euro-denominated investment grade corporate bonds, effectively taking credit risk on its balance sheet. Finally it launched a new series of TLTRO’s (Targeted Longer Term Refinancing Operations) at negative rates.
- In the UK, Governor Carney gave his testimony before the parliamentary Treasury Select committee. He acknowledged that no one knew what the long-term implications of an exit vote would be. However, on the financial sector, the UK exiting the EU would leave its financial services sector worse-off “without question”. He stated that ‘passporting’ is an essential factor that allows London to compete, which is only available to countries within the EEA.
- UK Industrial production printed broadly in-line with consensus’ expectations (0.3%m/m versus 0.4%m/m) after December’s marked decline. Manufacturing production in January was significantly stronger than consensus expectations, growing by 0.7% m/m against a consensus of 0.2%m/m. The upside surprise in manufacturing coincides with the January manufacturing PMI which had a strong start to the year, with the PMI output index having reached its highest point since June 2014.
- Eurozone GDP was revised up slightly to 0.3%Q/Q (-1.1% SAAR) from the preliminary release of -0.4% (-1.4%), beating the Bloomberg median estimate of -1.6% SAAR, almost the entire revision to GDP was attributable to private inventory investment.
- The Chinese data out over the weekend proved to be mixed with both retail sales and industrial production falling in February, while fixed asset investment provided a significant upward surprise. On the negative side, retail sales climbed 10.2% YoY down 0.5% on January and below expectations of 11%, suggesting that the weight of the weakness of the rest of the economy is starting to take its toll. Industrial output which rose 5.4% YoY (vs. 5.6% expected) and down 0.7% was said to be impacted by seasonal factors with weak global demand, deterioration in sectors such as steel and chemicals, and a slump in tobacco output weighed on factory production all quoted as reasons why industrial production slipped. Fixed asset investment on the other hand rebounded strongly, growing 10.2% YoY last month (vs. 9.3% expected). The tick up was largely driven by property investment with the value of property sales, land sales and new housing starts all up.
- Oil had another good week with WTI surging 7.2% last week and now circa 40% off its January lows. The gains were attributed to the continued aggressive spending cost and output cuts from US shale players and the acknowledgment by major oil-producing countries of the market supply imbalance. As oil fundamentals have clearly evolved and supply adjustments are now reflected in the price, much greater action is likely to be required for Brent to push meaningfully higher than $40/barrel.
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