See important Research Disclaimer.
This change continues in earnest with reports the ECB is looking to taper or wind back on its asset purchase program by around €10 billion a month.
The Fed have had a gradual tightening bias for some time and, as we saw yesterday, the RBA have moved to a more explicit neutral bias. The BoJ have changed from a quantitative view on policy (ie. targeting a level of base money) to one of focusing on the interest rate markets, specifically the 10-year government bond.
A reduction in the ECB’s bond buying program will no doubt shock the strategist community, although as the day goes on we will hear from many who claim the ECB were never going to extend the asset purchase program past March 2017.
We can point to Eurozone real GDP having grown above trend for some time, credit growth showing signs of ‘green shoots’ and European corporates issuing more debt than at any other point in history – largely as a result of the ECB’s polices having a strong effect on reducing borrowing costs. Of course, there is also the issue of a lack of bonds to buy in 2017.
The wash up has been a slight pick-up in implied market volatility with some signs of risk aversion that need to be watched closely.
It’s hard to know if the ECB’s policy to gradually reduce its asset purchases will cause the EUR to rally strongly from here, but the moves we have seen in EUR/USD haven’t been hugely aggressive. EUR/USD saw a reasonable move from $1.1158 to $1.1239, but has since retreated to test the figure. The stronger move in the EUR has been seen against the JPY, with EUR/JPY moving 1% on the session. We’ve also seen some selling of the higher yielding currencies, such as AUD, as carry trade structures are unwound.
AUD/USD started to sell off from around 23:00 AEDT, sometime before the ECB headlines hit the wires and hit a session low of $0.7608. This is not a reflection of yesterday’s RBA meeting, but a play on the slight pick-up in market volatility and a reasonable sell-off in fixed income, which may have further legs. Keep in mind the probability of a Fed hike in December hasn’t actually moved overnight and remains a 62% prospect.
A highlight overnight was the Italian treasury issuing a 50-year bond and getting a massive $18.5 billion worth of bids for the paper. This is well above what Spain and France got for a similar ultra-long maturity bond and it is certainly positive for the Italians that the market is happy to fund Italy’s deficit despite growing political risks on 4 December. Certainly those who took part in the bond auction overnight would be thinking they could have bought at slightly better levels in the secondary market given the sell-off in global bond markets on the ECB headlines.
Fixed income is a must-watch space for me, as a further sell-off could alter the investment landscape, not just putting pressure on currencies like the NZD and AUD, but in the equity market too, with higher yielding/income stocks under pressure.
The US 10-year treasury moved 6 basis points (bp) higher to 1.68%, which has helped US financials, but interest-rate-sensitive sectors like REITS and utilities have struggled. A move from yielding names could flow through to Asia, especially with the Australian 10-year having a vicious 16bp move higher yesterday.
Commodities are the big talking point from the trading community given the strong downside moves in the precious metals complex. As we would expect when this space is sold, silver has had the most aggressive move, with the spot price down 5.0%. Gold and platinum are down 3% and 2% respectively.
It doesn’t seem logical that this is purely a reflection of the USD, as the broader USD basket has only rallied 0.6%, but is more a combination of USD strength, a heavy unwind of a sizeable long positioning from the speculative trading community and technical selling. If we focus specifically on gold as soon as it broke below the $1310 to $1308 area (the 100 day moving average, 38.2% retracement of the May to July rally and rising trend support), the sellers aggressively moved in.
The subsequent break below the 1 September low of $1302 took out stop losses, in turn causing algorithms and other systematic funds to jump on board. A break of $1266 would now be key for a move back into $1200.
Equities and the Asia open
Despite the news flow there hasn’t been a huge sell-off on Wall Street and the US volatility index is pretty much unchanged so let’s not start panicking just yet. If European markets were to open now we would see the likes of the German DAX down 0.5%, but nothing too sinister.
Our ASX 200 call sits at 5458, so a fall of 26 points or 0.5%. Gold stocks will predictably get smashed on open, with NCM likely to open 6-7% lower, but banks are key today given the moves higher in fixed income and some unwind of the hunt for yield trade. ANZ’s Shayne Elliott takes to the stage in the parliamentary enquiry.
Event risk centres on Aussie August retail sales (consensus +0.2%), while the bigger market reaction should come from the US ADP private payrolls report and services ISM. The Pense vs Kaine vice-presidential debate kicks off during Asian trade today and could make for interesting viewing as well.