Stocks on both sides of the Atlantic register modest gains and a rebound in the Nikkei after Shinzo Abe yesterday dissolved his government, called for a new election and postponed the second planned sales-tax hike. In practice, the parliament will be dissolved on November 21st and while an election date is not set yet, December 14th has been leaked from sources. This rather drastic turn of events come on the back of the recent recessionary data, and make no doubts about it, much of the coming election will be on Abenomics. To a large degree then, a vote on QE – will it be enough?
In the Eurozone 30Y swap rates are quietly moving toward the levels of the panic session on the 15th of October and could easily be approaching some forced receiving though it remains unclear how much there remains of hedging needs for e.g. the L&P sector.
Japan takes the cake on large moves in the xCcy basis swap markets which in general have come to life after a long period of compression. Extreme movements in the entire USDJPY xCcy basis swap curve, but also CHF and EUR are seeing widening moves, see our dedicated treatment of xCcy basis here. For related reasons in fact; for Switzerlands case partly on speculation regarding a fee on deposits and the subsequent diminished demand for the franc (see also here), and for EUR again speculation in liquidity excess coming – in one shape or another – as the ECB strive for a balance sheet target.
(ECB) QE priced in: Yes or no?
Yes it is, but not fully and also not uniformly across submarkets. Periphery vs. core tightening as we saw Monday post-Draghi is a clear cut sign of expectation building as was yesterday’s increases in precious metals, most notably gold, which were attributed at least partly to Mersch’ statements on the potential scope of what the ECB may buy which includes bullions. At least theoretically, although Mersch’ stance was defensive which the market currently seems to ignore.
Other markets are indicative of QE, though e.g. the Eonia and xCcy basis markets really imply liquidity in a more general form. The latter has recently taken a turn towards pricing in more liquidity, also fairly quickly. Further, the upper left corner of the € swaption volatility grid is at least QE-indicative in their extreme compressed levels.
Push towards risk assets: ECB going for the wrong letter in P/E?
It is quite clear what the ECB is trying to do. Stacking the balance, increasing liquidity, weakening the euro and hoping that that correlates with both inflation expectations and also in due time, inflation prints. The current pricing is worrisome however as essentially the ECB are expected to buy everything that is “safe” (in a loose and broad sense). By driving up prices on these assets they aim to push banks and investors to risky assets. Perhaps they forgot to check e.g. the P/E’s on Eurostoxx 50 which remains at an elevated 22+?. Ideally the ECB should focus on improving conditions for bringing up the E rather than explicitly forcing up the P.
Today’s supply and data
The aforementioned minutes from both the Fed and BoE constitute the highlights. In addition we get housing market data from the US in the form of mortgage applications and house starts.
Supply from Canada today in the form of 2Y bonds and Denmark issues in DGB16 and DGB25. Thursday is a bigger day in terms of a lot of French supply.
Nordea