Arne Lohmann Rasmussen
Danske Bank A/S
Market movers today
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Very little on the agenda today, despite the University of Michigan’s consumer confidence.
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The market will use today to scrutinize yesterday’s message from the ECB.
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In Scandinavia, focus turns to CPI data in Norway. See more on the next page.
Selected market news
All eyes were of course on the ECB meeting yesterday. The ECB decided to extend its QE purchases by nine months to December 2017, but reduced the monthly purchases to EUR60bn from EUR80bn. The lower pace of purchases followed, according to the ECB, as the risk of deflation has now largely disappeared (the reason why the pace of purchases was temporarily lifted). President Draghi said the nine-month extension followed as the ECB wants to signal a sustained presence and no near-term tapering.
In our view, Draghi expressed a dovish tone during the Q&A and continued to repeat that tapering had not been discussed. According to Draghi, none of the ECB members want to taper QE, but the main message was a sustained ECB presence in the markets without distortions. Related to this, the ECB communicated additional flexibility in case of a less favourable inflation outlook or a worsening in financial conditions.
In terms of QE restriction changes, the ECB now permits buying bonds with a yield below the deposit rate while the maturity range includes the 1-2Y. The ECB has thus not lifted the 33% issue/issuer limit and will continue to follow the capital key distribution.
The decision to buy below the deposit rate at -0.4% and to include bonds with a 1-2Y maturity led to a strong rally in the front end of especially the German government bond curve, where 2Y yields dropped to -0.76%. The reaction was very different in the long end of the curve, where both 10Y and 30Y German bonds came under pressure due to the lower QE amount, though the yield level at the end of the day was not that much higher. All in all, it resulted in a significant steepening of the yield curves for 2Y10Y, 5Y10Y and 10Y30Y. It is our view that the steepening of the German curve and the EUR swap curve will continue in 2017, but at a more moderate pace compared to what we have seen over the past couple of months. Despite the ECB’s assurance that yesterday’s decision had nothing to do with ‘tapering’, this will eventually become the ‘talk of the town’ in 2017. Furthermore, the global ‘reflation’ theme and the impact of the US bond market will tend to steepen European curves in 2017. Working in the other direction is the fact that the yield curves are already very steep and that the ECB core inflation forecasts remain optimistic.
The ECB’s QE for at least another nine months boosted risk appetite further and especially European equities marched higher and the euro dropped. The SEK gained against the euro yesterday. However, we firmly believe that the Riksbank will have to stay relatively dovish after the ECB’s message. The Riksbank will definitely have to do more QE and, in our view, a 10bp repo rate cut in Sweden at the policy meeting on 21 December is still a possibility.
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