- Expectations are low for decision day at the ECB, Yellen lifts the dollar, and Brexit is leading conversations at Davos.
- Treasury yields raise on yellen´s hawkish outlook
At 13:45 CET the European Central Bank will announce its latest monetary policy decisions, and while not a single economist surveyed by Bloomberg expects a change in either rates or the pace of asset purchases, investors will be closely watching President Mario Draghi’s press conference 45 minutes later for clues on the direction of policy. One of the sticking points for the bank is the continuing lack of agreement on how to buy debt with a yield below the minus 0.4 percent deposit rate.
Gradual rate rises
The dollar rallied and Treasuries dropped following Federal Reserve Chair Janet Yellen’s speech in San Francisco yesterday. She expressed confidence that the economy will continue to improve, while saying that the pace of rate hikes will depend on how it evolves over the coming months. The probability of three rate hikes in 2017 moved higher, but not everyone is on board with this hawkish interpretation; Mohamed El-Erian described the comments as “somewhat more dovish than what I would’ve expected.”
U.K. at Davos
This morning, both the U.K. Prime Minister and Chancellor of the Exchequer were speaking at Davos. Theresa May pitched post-Brexit Britain as a champion of globalization and free trade, saying the country would be a “most forceful advocate for free markets and free trade anywhere in the world.” Philip Hammond expressed confidence that the pound would find an “appropriate level,” without giving any details as to where he thinks that level is. He also said that financial services would be a priority in Brexit negotiations, though the comments may be falling on deaf ears According to a report in German newspaper Handelsblatt, Goldman Sachs Group Inc. may cut London staff by 50 percent.
Overnight, the MSCI AC Asia Pacific Index dropped 0.3 percent, while Japan’s Topix added 0.9 percent for the second day of gains as the dollar rallied. In Europe, the Stoxx 600 Index was 0.2 percent lower at 5:40 a.m. ET ahead of the ECB decision. S&P 500 futures were also down 0.2 percent.
Trump a bad deal for Russia?
Senior officials inside the Kremlin say initial euphoria about President-elect Donald Trump’s victory is fading, as controversies over alleged Russian interference in the process are forcing a tougher line on Moscow in Washington. Investors who bought Russian assets on the November result are considering reducing holdings if they don’t see evidence of concrete moves to repair relations between the two states.
Equities mixed, waiting for ECB direction:
Asian stocks are mostly little changed overnight ahead of President-elect Donald Trump’s inauguration. The outlier was Japanese equities which found support from a rebounding USD.
Japan’s Nikkei rallied +0.9% on the back of a weaker yen (¥114.69) lifting the export-heavy index. Shares elsewhere in Asia have edged lower, with Hong Kong’s Hang Seng down -0.4% and the Shanghai Composite Index off -0.4%.
In Europe, equity indices are trading generally lower ahead of the ECBs interest rate decision. Markets continue to digest Fed Yellen’s comments made yesterday to gauge near to medium term rates outlook. Financials trade mixed on the Eurostoxx 600, while the FTSE 100 is weaker on energy stocks trading lower as oil markets consolidate after yesterdays large sell-off in crude.
U.S futures are expected to open in the red (-0.2%).
Yields climbed in Europe, playing catch-up with a selloff in Treasuries yesterday after U.S. Federal Reserve chair Janet Yellen said the American economy is strong enough to warrant higher interest rates — bringing the European Central Bank’s quantitative easing into sharper relief as policymakers led by Draghi meet today. Stocks fell, led by real estate after an indicator of U.K. house prices fell for the first time in five months in December. Oil resumed gains after the biggest drop in more than a week.
Bonds Yields on 10-year German bunds jumped four basis points to 0.39 percent by 11:37 a.m. in London while the yield on Gilts of similar maturity added six basis points to 1.39 percent. Treasury yields were steady at 2.44 percent.
Currencies The euro gained 0.2 percent against the dollar to $1.0655.
The Bloomberg Dollar Spot Index was little changed.
Russia’s ruble weakened as much as 1.2 percent to 60.26 per dollar after the government said it may restart foreign-currency purchases to tame volatility, before recovering to 59.65.
Commodities West Texas Intermediate crude added 0.8 percent, reversing from a loss Wednesday.
Gold lost 0.1 percent. It has fallen over the past two sessions, snapping a seven-day winning streak that was the longest since November.
Stocks The Stoxx Europe 600 Index lost 0.2 percent, with defensive sectors including utilities and real estate shares leading declines as bond yields in the region rose.
S&P 500 futures fell 0.2 percent, while the CBOE Volatility Index, known as the VIX, rose for a third day.
France’s Zodiac Aerospace SA jumped 22 percent after Safran SA agreed to buy it the plane-seat supplier for almost 10 billion euros ($10.5 billion).