Market commentary: Euro tumbles following Draghi’s comments

Fresh off the block this morning, Mario Draghi, the European Central Bank governor, during his testimony to the European Parliament stated that economic risks are “clearly visible” and said that the recovery is progressing moderately.

Draghi stated that more work is still needed on the economic and monetary union, and that QE will run past September 2016, if needed, to satisfy the inflation goals. He stated that the ECB will re-examine the degree of accommodation in December.

Following the testimony the Euro dipped below 1.07 against the Dollar and below 0.70 against the sterling as the governor made the case for further easing and support from the ECB.

Draghi said that inflation dynamics have somewhat weakened and "If we were to conclude that our medium-term price stability objective is at risk, we would act by using all the instruments available within our mandate to ensure that an appropriate degree of monetary accommodation is maintained,”

European stocks pared the initial losses sustained this morning, with the DAX currently trading at 10,901 and the CAC 40 trading at 4952 with the strong possibility of further QE announcements on the horizon at the next December meeting.

Trading remains volatile however as Draghi clearly stated that the likelihood of inflation returning to the European Central Bank’s desired level has declined and economic risks are rising, which was interpreted negatively by analysts. Inflation was zero in October, at odds with the central bank’s goal of keeping increases just below 2 percent per year.

Asia’s shares climbed the most in a week and U.S. stock futures advanced before speeches from Federal Reserve officials that may shed light on the odds of a December interest-rate increase. Australia’s dollar jumped the most in a month as strong jobs data eased pressure on the nation’s central bank to loosen monetary policy.

Financial companies led gains in the MSCI Asia-Pacific Index and Hong Kong equities rallied the most in a month. Oil traded near $43 a barrel before data that’s forecast to show U.S. crude stockpiles increased for a seventh week. With U.S. data signalling the world’s biggest economy may be strong enough to withstand higher rates, investors are monitoring figures from overseas to gauge whether there are any threats to American growth that may still concern the Fed.

In the bond markets, we are observing a high level of USD credit issuance standing now at nearly $57bn alone for the month of November so far and $1.4tn YTD. Putting it into perspective, that’s currently running about 17% higher YoY. At the moment supply is offsetting positive inflows and remains a big issue for US credit, however looking at this positively, should supply slow, spreads could grind tighter in USD bonds. This effect however could be counteracted by an impending rate hike, which consensus currently could be as early the next Fed meeting in December.

Following Draghi’s testimony, all European sovereigns traded tighter, with the 10-year bund trading down to 0.603% (-.07 bp) and Italy and Spain trading at 1.591% (-3.7 bp) and 1.81% (-1.4 bp) respectively.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.