The start of the week hasn’t been the most interesting from a news perspective, but the start of the ECBs quantitative easing program (which started on Monday) has sparked some incredible moves in the markets making what is usually one of the quieter periods of the month far more exciting.
Everywhere you look you can see the effects of additional liquidity being pumped in by the ECB. In the last 48 hours we’ve seen record low yields on eurozone debt, falling yields on US debt despite the first rate hike being just around the corner, a collapse in the euro driving the rally in the dollar, which in turn has brought weakness in commodities that yesterday led to a big sell off in stock indices. Under the circumstances, it’s hard to argue that the ECBs program isn’t causing waves in the markets.
The interest in US debt is very interesting as yields tend to rise as we approach rate hikes and yet we’re seeing them decline. The simple reason for this is that Treasuries are now trading at such a premium to Eurozone debt that it creates value there, regardless of any rate hike. Also, even if investors thing yields will rise in the coming months, the positive net effect of the stronger dollar which people are anticipating, still makes the move worthwhile. Today’s auction of 10-Year Treasuries will be very interesting and give a clearer picture of interest in US debt at the moment.
While capital outflows from the Eurozone is being predominantly driven by liquidity being poured in by the ECB forcing investors to look elsewhere for yield (as was the case in the US and UK in recent years) further delays in an agreement between Greece and its creditors isn’t helping matters. Monday’s talks didn’t take long to collapse and I’m not really more hopeful that today’s will go much better.
These talks frequently go up to the wire and with both parties still having a while to go before a deal needs to be reached on Greece’s reform package, I think we’ll be left waiting. This technically increases the likelihood of a Greek exit from the currency block although I very much doubt that will happen. Far more likely is that Greece is forced into concessions, is offered something small to return home with as a gesture of goodwill and the can is kicked a little further down the road.
Another disappointing batch of data from China this morning has hit Asian equities late on in the session. It’s become quite normal to be disappointed with Chinese data releases and the PBOC offering monetary stimulus in an effort to offset this has helped cushion the blow quite well but this morning’s data is pretty dire.
Industrial production rose by only 6.8% on the year, the lowest increase since March 2009 at the lowest point of the financial crisis. Fixed asset investment was also extremely poor falling to 13.9%, while retail sales were also at multi-year lows of 10.7%, completely a seriously woeful set of data releases. Of course, the Chinese Lunar New Year could be blamed for such a decline and it always makes more sense to average out the first two or three months of the year to get a better picture, but these levels are the worst in years so you can’t totally ignore it.
Today we have a couple of notable data releases, being UK manufacturing production and the NIESR GDP estimate for the three months to the end of February which will shed some light on how the economy has performed at the start of the year. We’ll also hear from Mario Draghi just before the open in Europe, which is always an interesting and potentially volatile event. EIA crude oil inventories later will also be of interest given the supply driven movements in oil over the last nine months. While rigs have been taken off line production has still been rising creating a large build in stocks, a trend that is likely to continue for months.