The severely downbeat speech from the ECB President Draghi stifled the euro market this morning. Euro shortly slipped below 1.07 mark as Draghi said that the bond purchases program could extend past September 2016 if needed. The possibility of deeper negative rates from December remains well alive. The market is already positioned deeply short on anticipation of a further unorthodox move from the ECB. Draghi’s speech today has been a reminder, not a surprise.
The Eurozone sovereign bond yields move south today, the core-periphery yields remain tight. The rally in Eurozone bonds could not continue interminably however, as the combination of low/negative yields and depreciation in euro will jeopardise gains in capital and curb marginal appetite in purchasing disproportionately expansive sovereign debt from the euro area. The risk of volatility rises as distortion in the Eurozone bond market amplifies.
Released this morning, the German consumer inflation was flat in October while consumer prices in France improved in line with expectations. As Christmas approaches, further improvement in European retail sales and inflation could give a bump to the economic activity and a lukewarm smile to the ECB. The positive seasonal bias will certainly not move the ECB away from its dovish policy path.
There is no taboo, no uncertainty; the European Central Bank is full-heartedly fighting to revive inflation and growth in the zone. The combat involves a cheaper euro and export-driven companies.
The sharp drop in euro-dollar basis swaps hints at sturdier selling pressures in EUR/USD. Traders continue chasing top selling opportunities to strengthen their euro short positions moving toward December, where a potential rate hike by the Fed could even bring the parity on the radar. Political issues in Portugal is also a rising downside risk.
European equities in red
European equities opened in the red. In Germany, utilities lead losses: DE:RWEG 9-7%) and E.ON (-3.2%).
RWE profits fell by 29% as electricity prices fell by circa 10% in the past nine months. On top, Germany moves to renewable energy sources, suggesting a long-term downside shift in company’s future revenues and profits. In this context, the stock price is expected to remain under pressure regardless of the energy prices. A rapid glance to analyst coverage shows that the majority remain on hold with a twelve month average price target set at €14.42. This is well below the historical average of €40.84.
Siemens AG NA (DE:SIEGn) (+2.23%) missed earnings estimates in Q4, while industrial profits beat expectations as sales surged by 13.8%. The company raised dividend and announced the second share buyback as no growth in profit margins is expected in 2016.