Market commentary: Disappointing PMI data results in profit-taking

Risky assets, most notably within the Eurozone, were in buoyant mode for yet another week last week (only to take a breather yesterday on the bout of profit taking moves) as expectations of a fresh wave of QE by the ECB continued to mount as a rally in sovereign bonds dragged benchmark yields lower and subsequently the yields on other asset classes, from IG bond to higher yielding bonds. Talk of the inclusion of corporate bonds forming part of the QE programme remained intact.

In fact, recent comments by the ECB’s Draghi and Constâncio (president and vice-president respectively), indicated that QE only needs to be made a formality. Ahead of Thursday’s rate setting meeting, the market will continue to expect an announcement of a broadening of ECB asset purchases, with the inflationary expectations being the focal point of the press conference. What the markets took particular note of last week was the emphasis on how sovereign QE would work. The level of detail given at conferences indicates that talks are at a somewhat advanced stage.

Interesting to note that, with the exception of the highly successful Securities Market Programme (SMP), a sovereign QE programme would be the first time that the ECB directly purchases sovereign bonds across the Euro area, which, according to a recent report published by Goldman Sachs, is likely to result in a convergence of sovereign yields across the Euro area, resulting in more compressed spreads against the benchmark German bund.  This will render the forthcoming QE programme to be somewhat different from conventional monetary easing by the ECB.

In the US, the season of the handing out of gifts is in full swing now, with Thanksgiving (and Black Friday) last week and the December (and Christmas) period in only a few weeks’ time. Indications by a number of large US retailers are skewing towards the positive side as lower oil prices are expected to provide a boost to real consumer spending. With inflation continuing to tick upwards, and the Fed’s tone in recent meetings and announcement on the hawkish side, it would be unthinkable for the Fed not to begin rate hikes in 2015, with the incoming economic data being at the forefront of the Fed’s decision making process.

It’s a data laden week on both sides of the Atlantic, with some key PMIs, retail sales and GDP data in the Eurozone on one hand, and PMI, employment data, factory orders and consumer credit, coupled with some key Fed members’ speeches in the US, looking to set the tone for the remainder of the week.

Within the LatAm space, following last October’s presidential election, the markets were eagerly awaiting to see how Brazilian president will structure her cabinet, and most importantly, the economic team whose arduous task is that of shoring up the country’s economy. The (positive) outcome caught the market unawares, resulting in a positive bout of Brazilian risk assets last week. Despite this, the economic climate and its conditions in Brazil remain challenging to say the least, and the new economic team has got quite a long road ahead of them.

Meanwhile, following the most recent dissolution of parliament by Shinzo Abe, Japan is clearly in election mode, with a recent opinion poll indicating that only a third of the electorate are on the prime minister’s side when it comes to approval of economic policy.

Furthermore, the opinion poll indicated that, on the contrary, the ‘Abenomics’ policies had an adverse effect and resulted in an erosion of consumer purchasing power following a sharp depreciation of the yen.

Despite this, overall, the current (or rather incumbent) administration is expected to get the electorate’s nod to sit out another mandate. Overnight, Moody’s announced that it downgraded Japan’s credit rating to A1 from A3, and placed a stable out on Japan.

This article was issued by Calamatta Cuschieri, visit for more information.

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