Draghi hints at Christmas package

Dovish Draghi fails to delight.
by Brenda Kelly

A fairly lacklustre start to the trading day with equity indices trading flat to lower despite what could be construed as a very dovish Draghi this morning. The head of the ECB appears determined to fight the disinflationary environment and it seems ever more likely that negative interest rates will prevail in the near term

A lower euro against both the dollar and the pound has been the result but any upside effects on Eurozone indices has thus far been elusive. Later sees the release of the Eurozone consumer confidence number, and it would appear that Draghi is already in the know on this print. The consensus is for a marginal move back from -8 to -7 but given the events of the past week, it could well continue a path below the prior number.

Later this morning we get to hear what the Deutsche Bundesbank president Jens Weidmann has to say on the situation. Often viewed as one of the more hawkish members of the ECB governing council

Further evidence that the UK progress on reducing the budget deficit is slow came this morning. Public sector net borrowing of the economy over the first six months of the fiscal year shows that the current run rate is behind schedule to meet the 2015/16 target and despite rising revenues. Public borrowing rose to 8.2 billion pounds in October from 7.1 billion pounds a year earlier. Osborne’s aim to cut the deficit this year to £69.5b (3.7% of GDP) is now beginning to look like a fairly difficult task.

The FTSE remains capped by the 6400 level and we’ve had little in the way of corporate data this morning although a host of broker rating changes have made their mark. Kepler Cheuvreux cut it’s rating on Easyjet to ‘reduce’ stating that the increase in competition is likely to impact operating margins in 2016. The shares have fallen 3.62%.

BAE Systems (+0.89%) has benefited from an upgrade from Investec. The UK defence review next week in light of recent terrorist attacks will likely limit the downside for defence budgets.

More chatter that Imperial Tobacco will be subjected to a takeover, this time British American Tobacco is the potential buyer, has seen the share price rise 2% this morning. Lonmin, giving credence to the phrase ‘rising from a very low base’’ is up 38% - shareholders have approved its deeply discounted rights issue, paving the way for the platinum miner to raise more than $400m and stave off financial collapse.

Barclays (-2%) has been cut to equal weight at Morgan Stanley. Impending regulatory changes in UK banks’ dividends policies are likely to impact negatively.

Draghi hints at Christmas package
by Ipek Ozkardeskaya

The US dollar is broadly sold-off against the majority of the G10 currencies, except the Antipodeans. The US yield curve flattens as the ‘dovish hike’ in December is being priced in with a strong conviction; the 2-10 year spread is at its lowest since April.

Earlier in the session, the euro-dollar was better bid on suspicion that the ECB President Draghi may not satisfy the very hawkish market expectations regarding the Eurozone’s monetary policy. Yet Draghi’s early words successfully delivered the dose of dovishness that the euro-bears were craving for.

Mr. Draghi charmingly blinked saying that the ECB will do ‘what it must’ to raise the inflation quickly. Implicitly, Draghi hinted that the expansion in the bond purchasing program is certainly around the corner by the end of the year. There may even be deeper negative rates under the Christmas tree this year.

His words curbed the early appetite in the euro-complex. German 2-year bund yield dropped to a record low. The widening divergence between the Fed and the ECB’s monetary policy outlooks paves the euro’s path to the south by the end of the year. The euro-bears are not ready to hibernate this December.

The upside attempts in the euro are expected to remain fragile against both the US dollar and the pound. Only surpassing 1.0790 (Fib 38.2% on Oct 30– Nov 18 decline), the EURUSD will technically step in bullish consolidation zone and could push for further gains to 1.0860/1.0960 (21dma/minor Fib 23.6% on Dec’14-Mar-Apr sell-off). The mid-term direction remains bearish with unchanged target at 1.0500/1.0450 zone. Against the pound, the 70 cent shelters a large volume of vanilla put expiries.