Financial market research and analysis

Asian equities gained after the European and US markets closed in the green, as the European Central Bank (ECB) delivered more stimulus to boost inflation and Trump administration hinted at an interim trade deal with China to ease tensions before the next face-to-face meeting scheduled early October. The idea is to delay some tariffs on Chinese imports in exchange of increased agricultural purchases from China and a compromise on intellectual property.

Talks that some parts of the US may have entered recession due to a worsened trade war may have helped President Trump softening his aggressive rhetoric against China and lifting the investor sentiment although the Federal Reserve (Fed) refuses to cut the interest rates at a fastened speed. The S&P500 and the Dow Jones traded a touch below their historical highs on Thursday. The activity in US futures market hints that the US equities could renew record before the weekly closing bell.

Nikkei (+1.01%) and Topix (+0.64%) gained on Friday, as the Japanese yen extended losses past the 108.00 mark against the US dollar.

Chinese markets were closed due to Mid-Autumn festival.

Hang Seng (+0.37%) traded on the back foot as HKEX’s somewhat unwelcomed bid for LSE left a sour taste in investors’ mouth, as Hong Kong continues being shaken by violent anti-China protests.

Gold remained offered near the $1500 an ounce on improved risk appetite.

Energy stocks were left behind as well, after the EIA warned that the OPEC could face a ‘daunting surplus’ in 2020 as a result of growing supply from competitors. Saudi Arabia said the cartel could discuss deeper production cuts in December to fight back a further tumble in oil prices on prospects of increased surplus from non-OPEC producers and weakening global demand.

The FTSE 100 (+0.09%) underperformed on Thursday’s session. The index managed to hold ground above the 7300p however, as mining stocks gained 1% to compensate for the decline in energy stocks (-0.99%).

Fresnillo surged 2.77% despite a weaker gold demand, as Macquarie upgraded the gold mining company to outperform with a price target of 890p (versus the actual price of 750p).

FTSE futures (+0.24%) gained timidly in Asia, as Brent crude dived below the $60 a barrel on rising supply concerns.

The FTSE is expected t open 13 points higher at 7358p.

The pound fluctuated in a tight range near the flattening 100-hour moving average (1.2336) against the US dollar. The euro-pound made a short attempt below the 0.89 mark, before the euro reversed losses following the European Central Bank’s (ECB) decision to cut rates and to buy sovereign bonds, again.


US yields improved, Euro-zone core-periphery yield spread narrowed after ECB decision

Major countries’ sovereign debt yields improved further. The US 10-year yield recovered to a five-week high of 1.79% as investors trimmed their excessively dovish Federal Reserve (Fed) expectations. The Fed is still expected to lower the interest rates by another 25 basis points at next week’s meeting, but the idea of a 50-basis-point cut has been abandoned.

In the Eurozone, the core-periphery yield spread narrowed after the ECB announced to restart buying 20-billion-euro worth of sovereign bonds each month starting from November 1st. The 10-year bund yield rose 4.6 points to -0.52% and the French 10-year yield advanced 2.5 points, while Italian and Greek 10-year yields dived 10 points. Spanish and Portuguese yields retreated past 3 points.

The euro first tanked then rebounded with tightened core-periphery yield spread, as the ECB lowered its deposit rate by 10 basis point to the historical low of -0.50% and announced another round of Quantitative Easing (QE). President Draghi also said that it’s ‘high time for fiscal policy to take charge’ in tandem with the unorthodox monetary policy to make sure that these measures lead to a higher inflation and a stronger economic growth in the Euro area.

Alas, the ECB’s latest decision fell short of market expectations, as investors anticipated larger monthly purchases, up to 45 million euro per month according to a consensus of analyst expectations. The single currency recovered to 1.1087 against the greenback. A move above 1.1110, the two-month down-trending channel top, could push for a broader euro correction.

Meanwhile, the probability of another 10-basis-point cut at October 24 meeting jumped to 68.4% at the wake of the ECB meeting but this might not happen as soon, given that the latest ECB meeting left the European policymakers sharply divided. French, German and Dutch bankers opposed to renewed asset purchases and the deeply negative rates continue being a source of drama among policymakers.

Apparently, there is a growing malaise about the effectiveness of the ultra-dovish monetary conditions that are in place for more than a decade. In fact, negative interest rates and large sovereign debt purchases have done little to lift growth and inflation in the Euro area. Though it is unknown what would have happened if the ECB hadn’t put in place such drastic monetary stimulus; Draghi’s supporters believe that it could have been worse if the ECB hadn’t acted the way they did.

One thing is clear, Christine Lagarde will be taking over a divided monetary committee and she will be facing the hard task of dealing with the finance ministers of a union in crisis.