Markets continuing to digest Draghi speech and China easing

• Chinese cut rates to promote growth and fight back against Japanese yen
  

• EURUSD close to 2 year low as we wait on latest German IFO measure

• Draghi sounding an urgent gong on the need to create inflation in the Eurozone

• Busy week of data, and low liquidity from Thanksgiving to bear in mind

China‘s decision to cut interest rates on Friday has governed the weekend markets, although there has been little movement outside of regional equities in response. The PBoC cut its one year lending rate by 0.4% and the saving rate on the same term by 0.25%. This is being presented as a growth forward policy but Japanese exchange rate policy will have definitely been in the back of these policymakers minds. This may be a good start towards promoting growth in China from the SME sector but I also see it as nothing that will really sway opinion in the short term.

I would have preferred to have seen a cut to the RRR rate, but maybe that will come soon in line with the PBoC’s “liquidity support when needed” statement released earlier in the session. I can easily see this becoming the start of a concerted push by the PBoC to loosen policy. On the face of it the reasons will be growth and the resumption of targeted output levels. In reality this is another beggar-thy-neighbour reaction to Japan’s Abenomics plan that has incited a trade fight in the Pacific. China has had to react to a 13% devaluation in the yen since September and will continue to do so if the heavy lifting in Japan continues.

Euro is weaker this morning after a speech by Mario Draghi. The ECB President’s speech contained the word ‘inflation’ no less than 45 times and said that inflation must be brought back towards target ‘without delay’. This urgency is a new found impetus within ECB comments moving into 2015.

Eurozone data of course remains poor but is not disastrous and it is this that still precludes us from being overly negative on the European single currency. The politics within the Eurozone around monetary policy have never been so complicated. We know that Mario Draghi may not be universally popular but his arguments around inflation are clear. At the time of writing the oft-cited Eurozone 5-by-5 swap – a measurement of five year inflation expectations in five years’ time, used as an indicator of ‘medium term’ thoughts on prices - remains well below the 2% target level. Even should Friday’s inflation reading stabilise at 0.4% then we can still foresee the longer run averages of inflation expectations creeping lower. Draghi will need to do more in the short term to get the rest of the ECB on side for his plan.

Such is the deflationary drag on the Eurozone at the moment that we are seeing moves in European peripheral debt that continues to break records. As of this morning the yield on Spanish ten year debt is below 2% for the first time ever, having seen Ireland’s equivalent move below the 1.5% level on Friday. The UK’s is around 2.05%, the US’s is 2.30%. Which one would you rather lend to?

EURUSD is close to the lowest levels since August 2012 this morning ahead of today’s IFO report from the German economy. The reading of business sentiment has been falling consistently since April of this year and is set to continue that trend for its November iteration.

The pressure on sterling from politics is an obvious risk into 2015; second to moves by the MPC that could catch market expectations of rates on the hop. Post Rochester, the bookmaker Paddy Power has estimated their seat totals for May’s election. Labour are forecast at winning 287.5, the Conservatives at 283.5, the Lib Dems at 28.5, the SNP at 21.5 and UKIP with 6.5. (half seats are for bets I.e. more or less than X). This means that a two party coalition would be impossible as 326 seats are needed. We could see a grand coalition but that would see another election called fairly quickly one would think. The reaction of sterling would be pretty horrific in this instance, I would imagine. A simple hung parliament clattered GBP assets in 2010.

Sterling is quiet this morning as is most of the currency market. Highlights in this week shortened by the Thanksgiving holiday on Thursday include tomorrow’s GDP reports from Germany and the US, UK GDP on Wednesday alongside US inflation and consumer confidence measures, Thursday’s OPEC meeting and Friday’s preliminary look at Eurozone inflation. Apart from that German IFO number today the docket is rather quiet.

Finally, I would like to ask you all a favour. A team from World First, myself included, will be sleeping rough on Friday to raise money for ‘We are Trinity’; a charity that helps house homeless people provide life coaching and help them get a job. We've been working with them for nearly a year now and have seen first-hand the fantastic work they do and how they have changed people's lives.

Have a great day.