Coeure's dovish comments boosts European equity indices
If there is one thing that is evident from today’s early activity on the newswires it’s that the ECB is determined to see the euro weaken. All major economies are struggling to achieve inflation so Benoit Coeure’s comments are rather timely ahead of the FOMC minutes release tomorrow evening.
The euro has now shed 1.25% against on the back talk of accelerated QE and lower depo rates from the central bank. If the euro has fallen like a stone, the European indices have rocketed higher with the German DAX and French CAC gaining an average 1.8%.
Lagging behind somewhat is the FTSE, up a mere 0.45% and still oscillating around the 7000 metric investors are awaiting release of the UK CPI data. Falling oil prices and the strong pound indicate that we could well see a negative print on a year on year basis. The monthly figure is expected to show an increase of 0.4%.
Land Securities (LONDON:LAND) is the top gainer. Being Britain’s largest property company, this was on the cards. Owner of the ‘Walkie Talkie’ tower in the city and with the value of its assets growing by £2bn in the year, the company seems well placed to take advantage of the supply constrained property conditions. Office construction activity, particularly in the capital has been booming and the company is set to benefit further from the squeezed conditions with a further 1.1m square foot of space still available to let. The shares were up 2.44% at time of writing.
Despite a return to quarterly growth, Vodafone (NASDAQ:VOD) shares took a tumble in early trade. Down 2.78%, the share price has struggled lately to move above the 240p marker and have gained a mere 3.79% year to date. Improvements in European markets and increased demand for 4G services, the telecommunications firm is expecting to see core earnings in 2015/16 between £11.5 and £12 billion. Emerging markets may be slowing but with growth picking up in the Eurozone, the company’s exposure here should help to temper any weakness elsewhere.
Building permits and housing starts will be in focus stateside today. Investors will be looking for some glimmer of light within the macro picture from the US which has been disappointing to say the least. Yesterday’s homebuilder sentiment was weaker but with a caveat that Q2 should be better.
We are calling the Dow 54 points higher to 18352.
Eurozone sovereigns rally as ECB says to power-up the QE in May, June
Euro has been aggressively sold in Europe this morning as the ECB announced to power-up bond purchases in May and June to avoid a depressed liquidity environment due to seasonality. Eurozone bonds are significantly in demand with Italy, Spain and Portugal 10-Year yields down by more than 10%. The German 10-Year yields are back below 0.60%. The rush into the Eurozone sovereign market is insufficient to counter the heavy euro headwinds this morning, as the Greek uncertainties persist. Greek bonds continue being sold as none of the EU officials backed-up their Greek peers proclaiming that an agreement has been sealed and EUR trades on slippery ground as euro-long traders cash in profits to avoid having a longer downside exposure. EUR/USD gained downside momentum after breaking the 200-hour moving average (1.1292) on the downside, EUR/GBP legged down to a week low (0.71501). We see limited appetite in rallies as tactical longs should rapidly vanish on quick profit takings. The inflows in the EZ sovereigns should however lend support. Decent euro bids are eyed at 1.10 (April – May uptrend base and psychological level) versus the US dollar.
Greece to face a liquidity crunch?
As we fail to see a proper bailout agreement between Greece and European Union, the outflows in deposits are drying the liquidity in Greece’s banking system. 7 billion euros worth of deposit left Greece in April and the outflows continue. With important amount of deposits leaving the country, Greek banks have to rely on their central bank, which requires increasingly higher emergency liquidity from the ECB. Last week, the ECB raised the ELA to Greece by €1.1B after emergency funds held in an IMF account were used to pay the Fund!
As the Greek banks become increasingly dependent on the ELA, the collateral inevitably dries; Greek banks are thought to have no more than a couple of weeks to run before insolvency. And this may mean a systemic crisis for Greece. The implications of such scenario are clearly not being priced in – at least not as heftily as ECB’s plans to purchase higher amounts of bonds - either because the Greece will be forced to agree on a bailout to avoid collapse, or the market will finally be relieved to see Greece out of the monetary union!