TradeTheNews.com Weekly
Market Update: Quantitative Easing, Redux
Fri, 23 Jan 2015 16:05 PM EST
The European Central Bank launched a quantitative easing program of its very
own this week, pledging to expand its balance sheet by at least €1.1 trillion
via purchases of Eurozone sovereign bonds. The ECB move had been extremely well
telegraphed to markets but European equities rocked higher and the euro tanked
on the news nevertheless (the EuroStoxx50 gained 5.6% on the week, EUR/USD
plummeted to 12-year lows). The Shanghai and Hong Kong indices saw robust gains
as the mixed 2014 Chinese GDP report gave investors hope that more PBoC easing
might be right around the corner. More current data only highlighted China's
slowdown: the January flash HSBC PMI reading suggested manufacturing could
contract for a second consecutive month. In the US, equities made back most of
their losses from last week and the 10-year UST yield consolidated below 1.85%
while many European government bond rates hit new lifetime lows after the QE
announcement. Markets also digested an influx of corporate earnings reports and
2015 outlooks. For the week, the DJIA added 0.9%, the S&P500 gained 1.6%
and the Nasdaq rose 2.7%.
The ECB will purchase €60 billion of sovereign debt from Eurozone member states
every month until at least September 2016. The program may very well go on
longer, until, as Draghi said, "we see a sustained adjustment in the path
of inflation." In a concession to German QE skeptics, both the ECB and
member national central banks will buy bonds, sharing the risk of default. The
Germans were hardly appreciative: Bundesbank President Weidmann rejected the
new QE program and said it would be very challenging to hike rates when they
were needed. The euro plunged after the announcement, with EUR/USD testing the
lower end of 1.11, for 12-year lows. Some analysts suggested EUR/USD could go
to parity soon. Yields on peripheral Eurozone debt plunged to all-time lows,
while the 10-year bund yield dropped to a record low of 0.353%.
Less than a week after the Swiss National Bank yanked away its euro peg,
markets were surprised by another central bank as the Bank of Canada
unexpectedly cut its key rate just a day ahead of the ECB QE announcement. The
Bank of Canada cut rates 25 basis points to 0.75% justifying the move on
grounds of falling oil prices and slowing reduction of excess capacity. Less
surprisingly, the Danish central bank cut its deposit rate to -0.20% and its
lending rate to 0.05% to offset the ECB action. Meanwhile the minutes of the
last Bank of England meeting revealed a big shift on the MPC: two former
hawkish members changed their policy stances, saying the bank should hold off
on rate hikes due to prolonged low inflation.
The IMF cut its 2015 global GDP forecast to 3.5% from 3.8% and reduced its 2016
global outlook to 3.7% from 4.0%. China and Japan were cut 0.3 pts and 0.2 pts
to 6.8% and 0.6%, respectively for 2015, while the US was the only major
economy to have its outlook raised. The IMF remarked that the dimming outlook
worldwide underscores need for stronger policy action to boost growth, and that
even the positive aspect of lower oil prices is offset by the broad slowdown.
Swiss officials were out in force defending their decision to drop the EUR/CHF
floor. SNB Chief Jordan said the cap was no longer justified because the Swiss
economy was improving and was never meant to be permanent anyway. Jordan
acknowledged that the economic situation in Switzerland was more difficult
after the decision while pleading that SNB monetary policy couldn't make
everybody happy. Swiss Finance Minister Widmer-Schlumpf estimated that EUR/CHF
at 1.10 was a reasonable level for the nation's exporters. EUR/CHF approached
last week's low of 0.9749, prompting chatter the SNB would have to cut rates
again.
The decline in crude prices slowed this week, with both WTI and Brent hovering
around the mid-to-high-$40s range throughout the week. At Davos, OPEC Secretary
General El-Badri asserted that oil prices would stay around $45-50 as global
economic weakness kept prices low. Back at the ranch in Saudi Arabia, King
Abdullah finally passed away after several weeks of rumors he had already died.
Salman bin Abdulaziz Al Saud, the 79-year old brother of the king and a former
Minister of Defense, was installed as the new monarch. Reports suggest he is in
poor health and possibly has dementia, with the complicated royal family riven
by factional disputes. Crude saw a brief rally on the confirmation of
Abdullah's death, but returned to trend as Salman pledged to continue all of
his predecessor's policies.
In earnings, oil services names Halliburton and Baker Hughes both topped market
expectations in fourth-quarter reports, with solid earnings and very good
revenue growth. Airlines Southwest and United Continental saw solid gains after
both firms comfortably beat earnings expectations. US-traded Industrials
Honeywell and General Electric gained after solid quarterly results. Shares of
German software giant SAP dumped after the company cut its profit outlook
through its 2017 fiscal year, while IBM sank after disclosing yet another
quarter of y/y revenue contraction and some less than stellar FY15 guidance.
American Express unveiled a plan to restructure, cutting 6% of its workforce.
UPS skidded after cutting its FY14 outlook on greater-than-expected
fourth-quarter expenses. McDonald's fourth quarter results were severely
undercooked: the firm missed on the top- and bottom lines, while comps remained
negative in all major regions. Netflix soared on good gains in subscribers,
especially in international markets.
After a very mixed Q4 in China, there had been fears that China's 2014 GDP
would miss both official and market expectations. The figure came in at 7.4%,
beating the 7.3% consensus outlook but below Beijing's 7.5% target, the first
time the official goal has been missed since 1998 and the lowest rate of growth
in 24 years. The consumption component of GDP rose to 51.2% from 48.2% in 2013,
reflecting continued rebalancing of the economy. December industrial production
topped estimates to reach a 3-month high, as power generation beat the low
power consumption figure estimated by the National Energy Administration last
week. Later in the week, the PBoC injected liquidity into money markets via
reverse repos for the first time in nearly a year in anticipation of Lunar New
Year holiday cash demand. HSBC flash manufacturing PMI also beat expectations
and improved to 49.8 despite remaining in contraction territory for the 2nd
straight month. After a perilous 7.7% plunge on Monday due to regulatory
scrutiny of margin securities at trading firms, the Shanghai Composite regained
its footing, testing a 5-year high above 3,400 on Friday.
As anticipated, the Bank of Japan maintained its key policy tool to expand the
monetary base by ¥80 trillion a year, while also extending its low-rate funding
scheme by a year and boosting provision to each institution from ¥1T to ¥2T.
The BoJ also kept its overall economic assessment, but raised its view on
industrial output to state that it has bottomed. Accompanying the decision, the
BOJ released its updated forecasts of growth and inflation, lowering the 2015
GDP target to -0.5% from +0.5% but raising its forecasts for the next two
years. The CPI outlook was particularly less rosy for FY15/16, as Governor
Kuroda lowered the target to 1.0% from 1.7% and effectively acknowledged that
Japan would miss its 2-year time frame to return to 2% inflation. Speaking in
Davos on Friday, Kuroda maintained there's still plenty of scope to adjust
policy if needed.